Your credit score decides whether you qualify for a mortgage, which loan programs you can use, and the price adjustments and mortgage insurance you pay. This post covers how FICO scores work, the score tiers lenders price from, and five steps to raise a score before you apply.
How FICO credit scores work
FICO scores range from 300 to 850; a higher score means lower risk to the lender. Fannie Mae and Freddie Mac require the classic FICO models for mortgages, which can differ from the score your card issuer shows you. FICO weighs five factors:
- Payment history (35%): Whether you've paid bills on time
- Credit utilization (30%): How much of your available credit you're using
- Length of credit history (15%): How long you've had credit accounts
- Credit mix (10%): The variety of credit types you have
- New credit inquiries (10%): How recently you've applied for credit
Mortgage credit score tiers
Fannie Mae and Freddie Mac set loan-level price adjustments by score tier, and mortgage insurers price PMI by score tier:
780 and above
- Smallest agency loan-level price adjustments
- Lowest mortgage insurance premiums
740-779
- Loan-level price adjustments one step above the 780 tier
- Low mortgage insurance premiums
700-739
- Larger price adjustments than the 740 tier
- Somewhat higher mortgage insurance premiums than the tiers above
660-699
- Larger price adjustments than the 700 tier
- Higher mortgage insurance premiums
620-659
- 620 is the minimum score for Fannie Mae and Freddie Mac conventional loans
- The largest conventional price adjustments and mortgage insurance premiums
- FHA's annual premium does not vary by score, so FHA is worth pricing in this tier
Below 620
- Fannie Mae and Freddie Mac conventional loans are not available
- FHA accepts scores from 580 at the program's 3.5% minimum down payment, and the whole down payment can be a gift from family
- FHA scores of 500-579 require 10% down under HUD rules (HUD 4000.1)
How to raise your credit score before applying
To raise your score, start 6-12 months before you plan to apply for a mortgage:
Pay down credit card balances
Reducing your credit utilization below 30%, and ideally below 10%, raises your score. Card issuers report balances monthly, so a paid-down balance shows in the score within one or two statement cycles, faster than any other step on this list.
Pay all bills on time
Set up autopay for at least the minimum payment on every account. Payment history is 35% of the score, and a single late payment lowers it.
Keep old accounts open
Length of credit history is 15% of the score. Keep older accounts open, even if you rarely use them.
Avoid opening new accounts
Each new credit application creates a hard inquiry that can temporarily lower your score. Don't open new credit cards or take out other loans in the months before applying for a mortgage.
Check your credit reports for errors
Request free reports from annualcreditreport.com and dispute any errors you find. Incorrect late payments or accounts that aren't yours lower your score.
How agency pricing treats a lower score
Agency loans are priced off a grid of loan-level adjustments keyed to credit score and loan-to-value (the Fannie Mae and Freddie Mac LLPA matrices). A 620 score at the same loan-to-value as a 780 score gets a higher rate, a higher mortgage insurance premium, or both, and the borrower pays that difference for as long as the loan is held.
See today's rates, and use our calculator to see what a rate difference does to your payment.
Before you apply
Pull your credit reports, check your score, and fix errors before you apply. Then get pre-qualified to see which programs your score qualifies for.