(Mar 26, 2023)
Your credit score is a critical part of the home buying process and could make or break whether or not you can get the mortgage you need to buy your dream home. According to Experian, around 30% of mortgage applications are denied because of low scores or incorrect borrower credit report information. This makes it vitally important to understand how your credit works when purchasing a home.
This guide will teach you everything you need to know about credit scores and how they affect your home purchases. Keep reading to discover essential info to help you prevent your dream house from slipping through your fingers because of a simple thing that you may have overlooked.
The Importance of Credit Score When Buying a Home
A credit score (aka FICO score) is a 3-digit number that predicts how likely you'll pay back debt. In other words, your credit score has a significant impact on everything from mortgage approvals and loan interest rates to insurance premiums and even utility hookups.
Your credit score displays a snapshot of your financial health. It measures how well you manage your credit based on factors like payment history and debt level. The higher your score, the better you manage your finances. While other factors may come into play when assessing an individual's ability to pay for homeownership, most lenders use FICO scores to determine your creditworthiness and help them decide whether or not to extend your credit.
The importance of your credit score in securing financing for purchasing a home can't be overstated. The scores lenders use when determining your home loan interest rate are called "qualifying scores." A good qualifying score can help you secure a lower interest rate and save money in monthly mortgage payments when buying a home. On the other hand, a bad credit score can leave you vulnerable to higher rates and costly financing options.
How to Get a Credit Score
To obtain your credit score, you have to request it. All three of our major credit bureaus (Equifax, TransUnion, and Experian) offer members one free credit report each year. This report contains information about all of your open accounts and your overall financial health—how much debt you’re carrying and whether or not you’ve been paying your bills on time.
You can build your credit score fast by making small, consistent purchases and paying them off on time. When you're ready to buy a home, the first thing you need to do is to check your credit score—you want it to be as high as possible since a high score means that you are more likely to qualify for better rates and better loan packages. To maximize your credit score, make sure all your accounts are in good standing; any delinquencies or collections could damage your credit rating.
The first thing you need to know when buying a home or applying for any loan is the several different credit scoring models. It would help if you kept an eye on your credit score, but you also have to be sure you're paying attention to and thinking about all of them. Lenders like VA Home Loans use multiple models, so even if your FICO score qualifies for VA, it doesn't mean it'll look great to other institutions.
VA mortgage loans are more lenient than FHA or conventional loan requirements, and they require a lower credit score. But it's important to note that while VA loans have the lower standards if your credit isn't strong enough to get you approved for a loan at conventional rates and terms, you may not be eligible for one through VA. So it's essential to handle your credit score before applying.
Credit Reports
Credit reports are often long and contain lots of information and complex terms. But understanding them can be vital for home buyers. Your credit report can help you know how prepared you are for homeownership if you know what to look for. It's essential to note that each bureau might have different information about you, and each report might have additional information about your history. However, every report must contain the following data:
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Your identification information. This includes your name, date of birth, Social Security number, address, and employment information.
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Credit accounts and inquiries
- Public reports and collection items
Credit Score Factors
FICO scoring can range from 300-850. Generally, scores above 700 are considered good; scores between 720 and 739 are considered excellent, and scores below 680 are considered flawed. The FICO scores are based on information found in your credit report. Five main factors go into calculating your score: payment history (35%), amounts owed (30%), length of credit history (15%), new credit accounts opened (10%) and types of credit used (10%).
Conclusion
Before applying for a mortgage and shopping around for a new home, it's crucial to know what your credit score is. A good FICO score makes you more likely to get approved and lower your interest rate. After all, it's hard to expect lenders to hand out money if they don't trust you'll pay on time. If your credit score isn't good enough for approval, you should work on improving your credit rating for a better tomorrow.
(Mar 26, 2023)
