As millennials move into these cities to live and work, many are looking to dip their feet into the mortgage market. Furthermore, many homeowners are also looking to refinance in order to take advantage of historically low interest rates.
Interest rates on 30-year fixed-rate home loans hit new lows 16 times in last year. Earlier this month these home loans averaged a record 2.65%, says mortgage giant Freddie Mac. It’s a great time to get a mortgage, but only for certain types of credit scores.
Do you know that only top-shelf borrowers are offered the very lowest rates? That’s partly because lenders have gotten stricter during the COVID crisis, and, as a result, the average credit score to get a mortgage has risen to its highest level in at least two decades, according to the Federal Reserve Bank of New York.
The New York Fed reports the typical score for mortgage borrowers jumped to 786 during the third quarter of last year. Only a quarter of those who secured a home loan between July and September had a credit score south of 740. Only 10% had scores below 683. Ellie Mae calculated that the average FICO® Score on all loan originations – that’s FHA refi and purchase loans, conventional refi and purchase loans and VA loans – was 751 in December.
To put it into context, Experian reports that the average FICO® Score in the US was 711 last year.
Working Toward Credit Goals
Here are some steps you can take to help make sure your credit score is where it needs to be, so you can take advantage of the lowest interest rate possible for your mortgage.
- A good place to start is to familiarize yourself with what is on your credit report. You should know your scores from all three major credit bureaus, Experian, Equifax and TransUnion. Also, it’s important to know what credit score model your lender is using. FICO® reports that 90% of top lenders use FICO® Scores when determining creditworthiness, for example.
- Credit monitoring services allow you to stay on top of your FICO® Scores along with the added benefit of identity theft protection with monthly alerts for suspicious activity and new credit inquiries.
- Limit any applications for new credit to a three-to-six month window before you buy because hard credit inquiries can knock a few points off your score.
- Pay your bills on time, and use issuer or calendar alerts to keep track of payment due dates.
- Keep older accounts open, and don’t close any accounts with balances because this can hurt your credit utilization ratio.
Now you can work toward your home-buying goals!