Buying a house has been a part and parcel of the traditional American dream and since purchasing a home is not that easy, most buyers go for the most practical and rational way; obtaining a mortgage. However, for you to get a mortgage, you need to have a good credit score. While credit score is not the only factor that mortgage lenders consider, it plays a significant role in determining the amount of interest you will pay. Considering this, an excellent credit score becomes a prerequisite to obtaining less costly home financing.
Despite information on credit scores being in the public domain, there so many bugging questions lingering in many buyer’s minds. Such as; What is a good credit score to buy a home? What is the average score required for you purchase a home? What is the minimum score? Is there any direct relationship between credit score and interest rates? This text will try to shed light by answering these bugging questions.
The Basics about Credit Score
Your credit score is not for only obtaining mortgage financing; it is a comprehensive score that paints a picture of your overall financial status. After the sub-prime market collapse that brought a ripple of effects to the entire mortgage sector, lenders started to be more diligent in their lending practices. They began using the credit score to determine whether the borrowers were reliable.
Credit score which is also referred to as FICO Score is a measure that ranks the best borrowers to the worst. To clearly represents a person’s creditworthiness the FICO score range between 300 and 850. If buyers have a low FICO score, it means they are unreliable; thus, it is difficult for them to obtain a loan and if they do, they will have to pay higher interests. If you have a high FICO score, it means you have been paying your debts on time, and you can be relied upon to pay your mortgage on time.
What Kind Of Score Do You Need To Buy A House?
For a conventional home loan, the accepted credit score to obtain the lowest interest rate used to be 720 or above but these days you must have a credit score of 740 and above. The minimum score to get a conventional loan is 620. For government-sponsored entities and the Financial Housing Authority, the minimum score may be 580.
Your ability to secure the best mortgage rates will highly depend on your score. To get the best you need to have 720 or more. It is, however, imperative to note that having a score that is less than 580 doesn’t mean you can’t get a home loan. You can still find lenders who are willing to lend you, but you will have to part with very high interests rates.
How Is Your Credit Score is Calculated?
To get your credit score, Fair, Isaac, and Company developed a formula that takes the following factors into account:
I. Your past debt payment history. This determines a significant percentage of your credit score. The more you pay your debts on time, the better the score.
II. Amount owed. The number of credit lines does you have; using a large percentage of available credit will lower your score
III. The duration you had credit- a large credit use history tends to be better for your score.
IV. New credit. If you are used to opening many new credit accounts, you may hurt your score.
V. Type of credit. Having several credit cards, installments loans or mortgage loans tends to boost your score.
Know and Repair Your Credit Score Long Before You Decide to Buy a House
Before you set up for a mortgage application, it is imperative that you view your credit score long before then. This is because repairing your credit score will need time and if your credit score has been pulled down by few mistakes, it will take months for them to be rectified. You should also make sure that you obtain all the three credit scores from the three agencies. Many lenders pull a tie-merge of the three credit report from the three bureaus(Equifax, Experian, and TransUnion). The will triple-check your credit before they decide to give you a loan.
Start repairing your credit as early as possible. Pay off your debts, make all your credit card payments on time and ensure that your credit card accounts are open even after you have paid them. Even though some people view a difference of 1% in rates as insignificant, it can cost you dearly, in the long run, it is, therefore, wise to keep your credit score on point if you want to avoid increased interest rates when you are buying a house.