Credit score decide the credit risk or creditworthiness of a person to buy a house. Here are their importance and tips to improve your score.
Oct 29, 2018
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Now, That's a Good Score!
On the FICO scale of 300 to 850, the median credit score is 720. According to Fair Isaac, the company that created FICO scoring, 40% of the US population has a score above 750 and 13% have a score over 800.
Your credit score highlights your ability to qualify for a mortgage for a favorable interest rate. Buying your first home or any home is a challenge. You need to prove the lender that you can afford mortgage payments with monthly income, have a stable job and make timely bill payments.
All these will be highlighted by your score through your payment history. Although the score is not the only parameter considered for this purpose, it can make you more likely to avail a mortgage loan at a low interest rate, which means lower monthly payments.
What Influences Your Score?
For determining your creditworthiness, every lender uses different sets of parameters. This is the reason why determining the minimum score for conventional loans is difficult in some cases. In other cases, such as government-backed or underwritten loans, you need to qualify for such scores.
Lenders rely on your credit score to judge the probability of you paying your mortgage loan back on time. Factors considered for this purpose:
Your previous payment history
Your salary history
Your current salary
Your available credit
The current acceptable scores
The present economic scenario
If your history highlights that you have made timely bill payments, it shows that you have a good credit score. If you frequently miss your payments or pay any other loan late, it will reflect in your history, as well.
In general, lenders provide loans with lower interest rates to borrowers with 740 or higher scores on the FICO. Conventional lenders might refrain from providing a mortgage loan to any buyer if his/her score is below 620 on this scale. In tight economic conditions, a score of at least 650 is considered to be good.
What Should be Your Minimum Credit Score?
Fannie Mae, a government-sponsored body, necessitates a minimum score of 620, although 660 may be needed in some cases. It is better to have a score of 740 or above for buying a house.
It can be difficult for first-time buyers to generate a strong credit score, due to their short credit histories. This is the foremost challenge for them that could be tackled.
The good thing, however, is that although you have never invested in a property, you can still boost your history by purchasing products on your credit cards and then paying off the total amount in time. You can also consider improving it by paying any other availed loan on time.
Home loans financed by FHA are a good option for all, especially first-time buyers. They require a down payment of around 3.5% of a home's purchase cost. This is quite favorable for first-time buyers who generally have low income to afford a house.
To avail it, you need to have a minimum score of 580. If you have it in the range of 500 - 579, you can still qualify for one, provided that you are ready to pay 10% or more as down payment.
As for VA loans, which are completely dedicated for active and retired military, besides their families, there is no minimum score to qualify, though a better one will mean lower interest rate.
Conventional Home Loans
This facility is not backed by the government and can be availed from any bank or mortgage company. There was a time when qualifying for the best rates with a credit score of 720 for consumers was not hard, today, a score of 740 or more is needed.
Typically, the minimum score of 620 is sufficient for a lender to provide such loans. As for people with scores in the range of 500 - 600, interest rates will be higher comparatively.
Finding Out Your Score
It is always advisable that people find out their credit scores before they opt for a loan. This will allow them to take the required steps to better their creditworthiness, thus, getting favorable rates.
For getting a free copy of your credit report from all three of the prominent bureaus (TransUnion, Experian, and Equifax), you can visit the AnnualCreditReport site. These reports encompass all the information related to your credit usage.
It is not necessary that all the bureaus have the same information about your performance; they may differ and so may the scores. Make certain that the information is accurate; if it's not, visit the bureau's website to find out the procedure to solve this issue.
Improving Your Score
Although boosting your credit score is not easy, there are some steps that you can take to raise it over time:
Make timely bill payments
Pay your credit card debt
Avoid taking several new credit cards at one go
Refrain from closing any card, even if not being used
It is advisable that you postpone the idea of home buying if you have to pay off debt and need time to make up money for it. Also, regardless of your decision, consider all the factors before making a decision.