As the prices for homes and land continue to skyrocket, more and more purchasers are looking to attain a mortgage to finance what will most likely be the most significant purchase of their lifetime. However, there come many questions about where to start and especially what your credit score needs to look like to qualify. In this article, we’re going to look at the right credit score range to secure a home loan and also cover some other questions you might have.
First Off, What Is a Credit Score?
A credit score is a three-digit number assigned to an individual based on a variety of factors that help predict how likely you are to pay back a loan. The score states whether you are numerically a good risk for the lender or not.
Although there are many algorithms used, the most popular is the FICO score, which uses a scoring system range that runs from 300 to 850.
People who have credit scores that are below 500 are going to have a really hard, if not impossible, time finding someone willing to write a mortgage. Conversely, people with scores of 700 and above will have a much easier path to financing a home.
Credit Scores Consist of Five Major Factors
1. Payment History
This is the most important factor, as it makes up 35% of the total credit score. This one factor is weighted so heavily because the people at FICO firmly attest that credit history is a great way to determine your future ability to pay your loan on time and in full.
2. Credit History
The longer you have had credit, the more data there is available to the people at FICO to determine a score. People who have just entered the world of credit must realize that the small amount of data impacts them. The less data they have, the bigger effect their “mistakes” like missed payments may have on their score compared to someone with 20 years of excellent credit. Credit history makes up 15% of your credit score, so it’s important to keep your credit healthy for future uses.
3. Credit Utilization
Weighing in at 30% of the total score, credit utilization is another crucial factor. Not only is it essential to have a credit history, but it is also critical to show that you can use it wisely. Regularly maxing out credit cards will ding your score, even if your payments are on time.
Additionally, having a significant amount of unused credit can be worrisome to a lender since there is the possibility you may someday run up a large amount of debt on another account, leading to delinquency on your mortgage.
4. The Types of Credit You Have
Having a current mortgage and having a credit card at Nordstrom’s are two different types of credit. Having both types of credit and using them responsibly can increase your credit score by showing you know how to handle them.
5. Recent Attempts to Get New Credit
When a credit agency sees an individual has recently opened or tried to open a lot of different credit accounts, the red flags immediately go up. A lender’s first thought is that there is some form of financial difficulty requiring the individual to take out more credit to make ends meet.
How Do I Check My Credit Score?
As several factors are going into a credit score, and the algorithms are not public knowledge, we cannot determine our own ratings. We need to go to outside sources to check our credit standing.
Does Mortgage Pre-Approval Affect Credit Score?
Yes and no. While there is a hit on your credit score, and it could go down a few points, lenders often look at this as comparison shopping. That is, they know you are shopping different lenders and will cut you some slack in that regard. But be careful not to shop around too much.
Am I Doomed if I Have Made Some Mistakes?
Not all people have great or even good credit. Sometimes they have dings on their credit from missed payments after a job layoff, divorce, or a drastic drop in the health of the overall economy. However, past problems with your credit do not necessarily mean you can never get a mortgage. Fixing those problems may take a little time and effort, but with some work, even those with the worst credit can still own a home someday.
The worst hit to a credit report is always the foreclosure of a home. After this happens, it is often two to three years of perfect credit use before a consumer can qualify for a loan. Many people were affected by the economic collapse in 2008-2009 and were forced into foreclosure or short sales on their homes. Thousands of those people are now again homeowners due to their diligence.
So, if you pull your credit score and it’s not what you would like it to be, it’s time to take a few critical steps to see where you can improve.
1. Be honest with yourself
Are you currently having a hard time paying your bills on time? Do you have too much month at the end of the money? If you are living beyond your means, it’s easy to fall behind on payments now and then. It may mean cutting out some of the extras for a short while until you can get your credit and your finances under control.
2. Set up automatic payments
Most banks and credit unions allow you to have your fixed monthly bills automatically deducted from your checking account. Setting up these sorts of bills means you never have to worry about another late payment.
3. Speak with a financial planner or a loan officer now
Many people want to buy a home but aren’t sure where to start. Sitting down with a loan officer or a financial planner can help you determine the best and quickest way to improve your credit scores. They may suggest things such as decreasing available unused credit, paying down or paying off specific credit cards or paying off a car loan.
With an expert’s advice to guide you, even people with the shakiest credit can find their way to homeownership. If you have questions, the easiest way to get the answers you need is to speak to one of our loan officers. They are always happy to help.