Home Buying and Credit Score: What You Need to Know
If you're thinking about buying a home, one of the things you'll have to consider is your credit score. Credit scores have a big impact on a home buyer's ability to qualify for a mortgage. Without a good credit score, you may not be able to get a mortgage for a good rate, and in some cases, you may not be able to get a mortgage at all.
Doing your research before trying to buy a home can help you understand the impact of your credit score. If your credit score is low, knowing what you can do to improve your score can help you position yourself to get a better mortgage.
What Is Your Credit Score?
A credit score is a numeric score assigned to each consumer with a credit history. The credit score is a measure of that consumer's payment habits and overall ability to pay back debts. Credit scores can go as low as 300 and as high as 850, with 850 being perfect.
Credit scores are based on credit reports, which are generated by 3 main credit reporting bureaus. A credit score and a credit report are not the same thing, but they are related. The credit score is usually based on factors like whether the consumer regularly pays their bills, how many accounts they have open, the age of their credit history and how much they owe altogether. All of this information is found on the consumer's credit report.
Credit scores are also based on credit inquiries by possible creditors. These inquiries, known as tugs, are often an indication that the buyer is planning to take out a loan. If multiple tugs occur in a short span of time, this can have a negative impact on credit history as well.
How Does Credit Score Affect Your Ability to Get a Mortgage?
Credit score is just one of many factors that mortgage lenders take into account when deciding whether to make a loan, how much the buyer can borrow, and what the mortgage interest rate will be. The minimum credit score varies by loan type.
What's a Good Credit Score?
A good credit score depends on which credit scoring company is being used, but in general, a score of 700 or more is considered good. Credit scores higher than 750 are typically considered excellent. Credit scores in the 600's are considered fair until the score reaches about 600 or so, and then it's considered poor.
What's the Minimum Credit Score for Purchasing a Home?
The minimum credit score for purchasing a home depends on the type of loan the buyer is trying to secure. In general, most loans will fund if the score is at least 660 or higher. FHA and some other federally backed loans may fund even if the credit score is lower, but the buyer may need to make a larger down payment. The buyer may also need to pay higher interest rates.
What Can You Do to Improve Your Credit Score?
Home buyers who would like to improve their credit score can do so by paying down debts and paying their bills on time. Sometimes, credit report errors are also responsible for a home buyer's poor credit rating. In cases like this, the buyer can improve their credit score by getting a copy of their credit report and then contacting the credit bureaus to make corrections as needed.
What Else Can You Do To Get a Mortgage If Your Credit Score is Low?
If you have a low credit score but still want to get a mortgage, contact several lenders to explore your options. Different lenders will have different loan options. Beware of lenders who express willingness to bend rules just to give you a loan. A responsible lender will only loan a home buyer money if the buyer is able to make the payments.
When taking out a mortgage, be realistic about your ability to pay back your loan. Avoid borrowing more than you need just because you qualify. You can enjoy more financial security by keeping your mortgage and payments low. This may mean buying a more modest house, and then selling and upgrading once your credit score is higher.
Contact a Lender and Real Estate Professional
If you're a Broomfield home buyer who would like to know more about borrowing money to purchase a home, contact a responsible and reputable lender in your area. To find out more about which homes are available in your price range, contact an experienced real estate professional in your area.