Credit scores and mortgage rates
Lenders use many different credit scores when deciding whether to approve a mortgage, and you may score differently from one scoring model to another.
The most common credit score used by lenders is the FICO® Score, which is based on a formula that considers information from your credit report. It's a number that ranges from 350 to 850 and gives a snapshot of your creditworthiness.
The best mortgage rates typically go to those with scores above 740, but FHA borrowers can generally qualify with scores of 620 or above. Anything less may require you to take some time to repair your credit.
The only real way to know whether or not you have a good credit score is to check. All 3 credit bureaus let you check your credit score for free, once every 12 months. To check your current credit score, visit www.FreeCreditScore.com(opens in a new tab). Or if you bank with BB&T, you can get your free score once a quarter in U by BB&T the mobile banking application from BB&T.
Understanding your credit score
According to FICO, five major factors determine your credit score, the first two of which carry the most weight:
- Payment history – 35% of your total credit score is based on your payment history and how often you've made consistent, on-time payments.
- Credit utilization – 30% of your total credit score relates to the amount of credit you have available as a percentage of the amount being used. Habitually getting close to credit limits or maxing out credit cards is seen as a potential risk to a lender and an indicator that debt is not being managed wisely.
- Length of credit history – 15% of your total credit score is based on the length of time each account has been opened and length of time since the most recent activity.
- New credit – Comprises 10% of your total credit score. You should avoid opening too many new accounts at the same time, as this could trigger concerns about your financial stability.
- Credit mix – Comprises 10% of your total credit score. Experts say that repaying a mix of installment loans like a mortgage or an auto loan, and revolving debt such as credit cards, shows that different types of debt can be handled and indicates a lower risk.
Credit score ranges and their definitions
FICO Scores are used in 90% of credit decisions, so they're a good indicator of how your credit will be viewed to potential lenders.
- 740 – 850: Excellent credit – Straightforward credit approvals and the best interest rates
- 680 – 740: Good credit – Borrowers are generally approved and offered good interest rates
- 620 – 680: Acceptable credit – Borrowers are generally approved but interest rates are higher
- 550 – 620: Subprime credit – Approval is possible but not guaranteed, and terms are likely to be unfavorable
- 300 – 550: Poor credit – Slim-to-no chance of getting a mortgage. Borrowers will have to take steps to improve credit scores before being approved
Before applying for a mortgage, there are several things you can do to improve your credit score:
- Review your credit report for any errors – Equifax, Experian and TransUnion let you do this for free once every 12 months. Dispute and resolve any issues immediately.
- Pay down or pay off credit card balances – If you have several cards that have low balances, consolidate and pay the low balances off.
- Don't apply for new debt – If you're shopping around for mortgage rates, do your shopping in a short period of time—it won't count against you if it's done within a 30-day period.
The bottom line
If you pay your bills on time, keep your account balances low and use credit wisely, you'll be better positioned to get your mortgage approved with a competitive rate. Alternatively, if you need to make some improvements to your credit score, allow sufficient time before applying, so that any changes can take effect.
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Loans, lines of credit and credit cards are subject to credit approval.
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