Home Buying and Your Credit Score

Buying a house? Start by understanding your credit score

Whether you’re buying your first or your fifth home, your credit score is the key to getting you to the closing table.  Your credit score will dictate your eligibility for a mortgage, your rate and terms, the loan size you’ll be eligible for, and ultimately, your monthly payment.  Paying attention to your credit score and understanding how it positions you as a home buyer is critical to successfully navigating a real estate purchase.

Good credit, or bad?

Many buyers ask what their minimum credit score needs to be to buy a house.  While this question is important, it doesn’t always have a definitive answer.  FHA loans require a credit score of 580 to qualify for their reduced down payment program, and lenders such as Freddie Mac generally won’t consider you if your score is below 660.  Even with a lower score, there are programs out there to help.  Together let’s find the perfect mortgage expert to guide you.

What determines my score?

Five key factors are used in calculating your FICO score, although the exact formula is a closely guarded secret.  In descending order of importance, the following considerations are used in calculating your credit score:

  1. Payment history – Have you made timely payments on your debts?
  2. Amounts owed – This includes the number of lines of credit you have but also the percentage of your total credit your using. The total indebtedness is also a factor.
  3. Length of credit history – How many years of credit history do you have?
  4. New credit – Have you opened new accounts recently? How many?  Have you attempted to open new lines of credit but been denied?
  5. Types of credit used – Of your debts, what percentage comes from credit cards, retail accounts, installment loans, mortgages, student loans or other sources?

How does credit score affect my mortgage?

Once you determine whether your credit is appealing to lenders or not, your credit score primarily influences the type of interest rate banks will offer.  Those with lower credit should expect higher interest rates than those with better scores.  Low credit buyers can help compensate for the increased rate with a larger down payment.  Buyers with good or excellent scores should negotiate the rate offered by the bank – you have powerful leverage to make a deal.

Buying with low credit

If you’re going to attempt to purchase a home with less than ideal credit, there are things you can do to improve your outcome.  First, you should prepare documents that can verify your income, your payment history, and any progress you’re making towards paying down debts or reducing your overall percentage of debt to available credit.

Second, consider qualifying for your mortgage with a trusted co-signer.  A co-signer can help you hurdle and credit problems while still building positive credit through your regular mortgage payments.

You can also consider applying for an FHA loan.  These loans are designed to help convert renters to home owners and feature qualifications that make it easier for those with low credit to buy.

Finally, the best thing any potential buyer can do is work to build up your credit score.  Examine weaknesses in your credit using the factors listed above and work diligently to improve.

 

The ultimate rewards of owning your home are countless.  Even if you find your credit doesn’t reflect your enthusiasm for home ownership, know that with smart changes to your habits and focusing on the end goal, you and your family can one day grab your piece of the American dream too.

In today’s market pre-approval is crucial to locking down your next home.  Call/text me today so we can get you on the right path 734-637-1375.

 

 

 

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