Your credit profile can play a big role in determining what type of lifestyle you lead: the house you own or rent, what kind of car you drive, and your ability to start a business. Homeownership may be something you have dreamed of for much of your adult life and making sure you have a good credit score can help you afford the house you want.
In May 2019, the median price of a new home in the U.S. was $309,000. Most people don’t have that kind of money sitting around in cash, so they have to apply for financing. In fact, Americans collectively owe more than $9 trillion in home loans—more than any other kind of consumer debt.
Before you apply for a mortgage, it’s crucial to get your finances in order. One of the most important qualifiers (though not the only one) for a mortgage, and for getting the best program options and terms, is having a good credit score.
But what is a good credit score to buy a house? How can you figure out whether you make the cut? And if your score is on the low side, what are your options for improving it? Fortunately, there are more resources than ever for finding out your current score, and options available for trying to boost it.
Credit Score Basics
A credit score is a succinct, simple way for lenders and creditors to figure out how a potential borrower manages their credit. Many factors go into this number, including whether you have a history of paying your bills on time, how much debt you have relative to your credit limits, the number of accounts you have, and, on average, how long you’ve held those accounts. The score also takes into consideration whether you have a history of derogatory credit such as judgments, collections, or a bankruptcy on your record.
Credit reporting agencies keep track of the above information, and other companies may use an algorithm to assign you a credit score based on it. The most commonly used model is the FICO® credit score , which ranges from 300 to 850. This score helps lenders see how you manage credit and in turn your ability to repay a new loan.
If your score indicates that you’re a high-risk borrower, a mortgage lender may choose not to give you a loan or may offer you one with less favorable terms. The government offers a free annual credit report for consumers to check their credit profile, however this free annual version does not offer a credit score only your credit history.
When checking different websites offering a free credit score it’s good to note that the credit score given may not be the same credit score a lender utilizes for loan eligibility. Lenders will usually pull credit scores from all three credit bureaus and in most cases use the middle score.
How Good of a Credit Score Do You Need to Buy a House?
Generally, credit scores above 800 are considered exceptional, those between 740 and 799 are very good, and those between 670 and 739 are good. Anything below 669 is seen as either “fair” or “very poor.” The credit score you need to qualify for a mortgage can vary depending on the loan program, lender and other criteria.
Although there are loan programs you can apply for that do not require a credit score, these programs are generally referred to as Non Traditional Credit. Instead of a credit score, a credit profile is built using alternative credit sources such as insurance payments, cable, etc. These Non Traditional Credit programs generally come with additional criteria such as tighter loan qualifying ratios.
The rule of thumb is the higher your credit score, the more choices you will likely have when it comes to loan programs and qualifying. That might seem pretty high, but the average national FICO credit score is actually 704 as of September 2018—an all-time high.
If you’re applying for a government-backed mortgage, such as a Federal Housing Administration (FHA)
loan , you may see that they are one entity that offers a Non Traditional Credit loan for those who have not established sufficient credit, however not all lenders offer these Non Traditional Credit loan programs.
In addition, these loan programs may have lower qualifying ratios and higher down payment requirements. For a standard FHA loan using traditional credit, you will likely need a credit score of at least 500 with a minimum of 10% down, or at least 580 for the minimum down payment of 3.5%. Some lenders may impose “credit overlays” and that require a higher credit score such as 620 for FHA loan eligibility.
How to Improve Your Credit Score
Credit scores aren’t written in stone. If you’re having trouble qualifying for a mortgage, or are not getting the terms you were hoping for, you can take steps to help improve your score. Here are some strategies that are considered effective:
Pay your bills when they’re due—every time.
The strength of your payment history represents 35% of your FICO score . That means working on this area is likely to be the single most important thing you can do to get your score up. Make sure you pay at least the minimum balance on all your bills, every month, by the due date. This includes credit cards, medical bills, phone bills, student loans, utilities, and any other bills. Get up to date on any payments you’ve been behind on, and then stay current.
If you’ve missed payments in the past because you forgot, set up reminders in your calendar or automatic transfers through your bank or the company billing you. That way, you won’t have to think about it.
Another good idea is to save up an emergency fund that’s equal to three to six months of your living expenses. When something unexpected comes up, you’ll have a way to pay for it rather than racking up unsustainable balances on credit cards.
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Improve your credit utilization ratio.
This ratio, which refers to how much of your available credit you’re taking advantage of, also makes up a significant chunk of your FICO score—30% to be exact . The main way you can improve this ratio is by paying off debts. Of course, that’s not always an easy thing to do.
One way is to start by taking a break from your credit cards to avoid growing your debt even further. Then figure out the interest rate that you’re paying on all of your loans and credit cards. Put any extra cash you have toward the highest-interest debt first, while still paying the minimum balance on your other accounts.
The rationale for this method is that the higher the interest, the more that balance will grow each month, so focusing on that account first will help you eliminate your debt faster. One option that helps some people pay off high-interest debt faster is to take out a personal loan—these offer fixed rate terms and typically come with lower interest rates than credit cards.
Be careful when opening or closing new credit accounts.
You might be tempted to open a bunch of credit cards to improve your credit utilization ratio. However, this tactic may backfire – at least in the short term . This can be due to many factors, such as number of inquiries or average age of accounts, among other things.
You may wonder whether you should start closing accounts to address your debt, but don’t cut up all your credit cards just yet. Closing too many cards could lower your credit utilization ratio by lowering your available credit. Also, if you close some of your oldest cards, that may reduce the average age of your accounts.
And keep in mind that closing an account doesn’t mean that the payment history disappears from your credit report or your score calculation. Depending upon the type of derogatory credit, negative ratings can show on closed accounts for up to 10 years.
Make sure your credit report is accurate.
Since your credit report is the basis for your credit score, it may be a good idea to make sure it’s error-free, especially as identity theft is becoming more common . You can order a copy of your credit report once a year for free from the three major credit reporting agencies—Equifax, Experian, and TransUnion—at AnnualCreditReport.com . Read it over to make sure nothing is amiss. If you see anything suspicious or incorrect, you can file a dispute with the credit bureau. In most cases, they have to investigate within 30
days . Keeping tabs on your credit history can be smart no matter what, but it’s especially important when you’re applying for a mortgage.
Build a credit history if you have a limited one.
Sometimes your credit score can be on the lower side because you just haven’t built up enough of a credit history. One reason may be that you haven’t opened a sufficient amount of credit cards and/or installment loans. Another reason may be the amount of time that the accounts have been open. Considering that thin history, it may not be easy to qualify for new cards or loans that would help you build up a credit record. But you do have options.
One is to open a secured credit card, which requires you to put down a deposit that will stand in as your spending limit. After you make on-time payments over a certain period, you’ll get the deposit back. Another option is to get a family member or friend with strong credit to serve as a cosigner for a loan or credit card. Just be sure to make payments on time or the cosigner’s credit is likely to suffer.
Make Your Dream of Homeownership a Reality
If you’re ready to become a homeowner, qualifying for a mortgage is the first step. Your credit score is one of the most important factors in determining eligibility for the type of loan program, terms and other factors. If your credit score leaves room for improvement, you can take action. It may not be easy, but your dreams of owning a home may be within reach.
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