What to Know about Credit Scores (if you want to buy a house)
A Credit Score (commonly also called a FICO score) measures risk for an institution that is being asked to lend you money.
Want a car loan?
Need a personal loan?
Want a landlord to rent you their home?
Want to buy a home?
Your Credit Score will be very important.
In school, doing your homework earned you grades from F to A+.
In life, borrowing and paying back money earns you a credit score.
FICO scores typically range from 300 to 850.
The higher the score, the better your credit.
Anything 740 or higher is considered very good.
How are FICO scores calculated?
1. Payment History (35% of score)
Do you have a proven track record of make payments on time?
35% of your score is based on your payment history, so PAYING BILLS ON TIME is your most important first step.
Missing payments is the fastest way to kill your score.
2. Amount Owed (30% of score)
Lenders want to see that you can keep your borrowing under control. If they give you a $10,000 line of credit, you’ll earn a better credit score if you only spend $3,000 of it than if you spend $9,999.
If you need to borrow $6,000, rather than maxing out all $6,000 on one credit card (100% usage), see if you can get three cards, each with a $6,000 limit and put $2,000 on each.
This will get you the money you need and keep your “usage” rate low (but don’t forget to pay them off! See #1 above).
3. Length of Credit History (15% of score)
Show yourself to be a trustworthy borrower over time. For this reason, even if you don’t use them anymore, DON’T close out old credit cards.
Let the card collect dust, but keep the account longevity
4. Credit Mix (10% of score)
This is a lesser consideration, but to get a true top-tier score, it’s best to have a blend of “types of borrowing” - mortgage, paid-off credit cards, and on-time car payments (if you MUST have a car loan).
Speaking from experience, you can earn a great score (740+) without having a car loan.
5. New Credit (10% of score)
How many times in the last six months has a lender pulled your credit? If it’s too often, you can appear to be a desperate borrower taking on too much debt at once.
Note: To allow customers to shop around and get the best rates, in mortgages, multiple credit pulls within 30 days will result in the same score provided to all lenders UNLESS other type of new credit has been applied for during that 30 day period.
Additionally, these credit checks must be for the same purpose. Two car loans credit checks will count as one, but a car loan check and mortgage application will count as two. (learn more)
Want to check your credit score?
Per the FTC -
Visit AnnualCreditReport.com to request free copies of your credit reports. Other sites may charge you or be fraudulent sites set up to steal your personal information.
By law, everyone is entitled to one free credit report every twelve months from each of the three credit reporting agencies. In 2020, soon after the COVID-19 pandemic upended the finances of millions of people, the three agencies announced they would temporarily make free reports available every week. The program was extended twice and is now permanent.
What credit score is required to buy a home?
Most home buyers will use one of these four loan types, and each has it’s own qualifying criteria.
FHA - usually 580 or higher, but can be as low as 500
VA - no minimum, but lenders want to see 580 score or higher
Conventional - require a 620 minimum credit score
Jumbo - bigger loans (for more expensive homes) typically require a credit score of 700 or higher
Note: For FHA financing when credit scores are below 580, there are often restrictions in demonstrating the borrower has reserves, or invests more than the minimum 3.5% as a down payment or the likelihood of having a lower approval ceiling in the debt-to-income ratio. A Lender can talk with you about specific circumstances.
Have You Previously Filed for Bankruptcy?
In the event of a former bankruptcy, there is still a path to qualify for a mortgage but there are restrictions depending on the period of time since the discharge and what type of mortgage product is being sought.
As an overview, the waiting period on a government mortgage such as FHA or VA is usually 2 years (and the creation of new credit being demonstrated as being paid responsibly) or 4 years if seeking Conventional financing.
If a Chapter 13 bankruptcy, where there is a payment schedule to reimburse the creditors, the waiting period can sometimes be reduced if consistent payments have been made timely and with court approval.
Again -- a Lender can offer specific details on a particular circumstance.
If you have a desire to buy or sell, let’s chat!
Life has a way of keeping us all moving, and I love to be your real estate agent.
Contact me here to set up your free and confidential consultation.
Kevin
