What Credit Score Do You Need to Buy a House?
A lot of home buyers worry that their credit scores are too low to buy a home. The first thing to know is that you don’t have to have perfect credit to buy a home. There are many choices in loan programs, and many are available for those who have less than perfect credit.
Hello, this is (name) with (company) and in this video I am going to share what you need to know about buying a home and your credit score.
The first step is to know your credit score and what loan programs you may qualify for. You can do this by meeting with a professional state-licensed mortgage lender. We are not talking about going onto one of those online mortgage applications sites either. What we are talking about is working with a professional lender in your area. Someone who can actually sit down and talk to you about your options.
To give you a better understanding of what loan options are out there, let’s look at conventional loans.
Conventional loans are the most common loan type. On the credit score scale, which ranges from 350-850, conventional loans require a credit score of at least 620. Other loan types allow for lower credit score minimums, and some mortgage programs have no credit score requirement whatsoever.
So, why are credit scores so important in buying a home?
Credit scores help your lender determine the likelihood that you’ll make timely mortgage payments. The credit score will give a baseline example of how you’ve done in the past paying your debt. This is why taking care of your credit is so important.
Fair Isaac and Co. (FICO) which is what is used to calculate your credit score uses the following calculation for your credit score:
1. Payment history (35%)
2. Current credit usage (30%)
3. Length of your credit history (15%)
4. Types of credit (10%)
5. Recently opened credit lines (10%)
These 5 factors provide a glimpse into your financial habits and history, and help lenders assess your financial health. Home buyers with lower credit scores are typically assigned a higher interest rate.
HOW TO IMPROVE YOUR CREDIT SCORE
There are things you can do to help improve your credit score, but first check your credit report to learn what’s comprising your score. All consumers get access to a free annual credit report at AnnualCreditReport.com.
If you are looking at buying a home in your future, be sure to start developing habits that will improve your credit score. Here are recommendations for developing those healthy habits:
Pay Your Bills On Time
Remember your payment history accounts for 35% of your FICO credit score.
Lower Your Credit Usage
You can increase your credit score, by decreasing what you owe, so consider increasing payments on your credit cards or even ask for a credit limit increase.
Avoid New Credit Lines
Don’t open new credit! Opening new credit results in what is called a “Hard” credit inquiries and can affect your credit score for the next six months.
Don’t Close Old Accounts
Having those older, more established lines of credit can actually help you, so keep old credit lines open and catch up on old payments or delinquencies.
Be Patient
If you are working to increase your credit score, it sometimes seems like it takes forever, but remember, it can take up to 6 months to make big changes in your credit score, so do the work and wait it out.
Credit scores don’t improve overnight and keeping your debt to a minimum pays off when you’re planning to buy a house. Even small credit score improvements can reduce the interest rate you get, or the loan program you qualify for.
Your credit score isn’t the only factor for mortgage approval. However, it’s a key indicator of your financial health. Track your credit, make on-time payments, and get
help to choose the home loan that’s right for you. Be sure to work with a state-licensed mortgage professional if you have questions about your credit score and loan options.
Thanks for watching. If there is anything we can do to help you with your home financing goals, please don’t hesitate to call.
