How does your credit score affect your ability to buy a home?
Buying a home can be a daunting time for everyone involved, and even if you haven't found your dream home yet, the idea of owning your own home can be a mix of scary and exciting all at the same time.
If you've been living with your parents or rented for years, finally having your own home brings a freedom like nothing else. Paint the walls any color you want, keep your dishes in the sink, put your lounge in a corner instead of in the middle of the room. The options are endless.
But with that excitement comes significant financial responsibility, so you'll want to exhaust all your options when it comes to financing. For most people, this means getting a mortgage through a bank, but in order to do so, you need to understand that banks aren't going to lend money to just anyone.
To get approved for a mortgage, a credit check will be carried out first. This will have a major impact on whether you qualify for the loan or not, and if your credit check does not meet the standards, your chances of getting a mortgage will be low.
Darren Robertson of Northern Virginia Home Pro says, “Buying a home is a big decision and can be an exciting but also very stressful time. This stress can be greatly reduced by checking your credit score before you start your property search, helping you avoid major disappointment when you do find the right property.”
So what is a good enough credit score to buy a house?
What is a credit score?
A credit score is a three-digit number between 300 and 700 calculated by companies like Equifax. Essentially, it's a numerical representation of your financial history and current financial situation. Your credit score is calculated by an evaluation of your financial situation throughout your lifetime, including your payment history, your used and available credit, how long you've had credit, public records, and inquiries into your credit file.
What are good, bad and average credit scores?
So what is a good credit score, a bad credit score, or an average credit score? Read on to find out what each score typically looks like.
good
A credit score of 600-700 or higher is considered a “good” credit score. This allows you to get a loan faster and easier than someone with an “average” or “bad” credit score. This means lower processing fees, down payments, and interest rates — all good things if you're looking for a mortgage. If your credit score is close to this number, you're doing it right.
average
A credit score around 550 is considered an “average” credit score. Most people's credit scores fall in this range, so you may be able to get some financial benefits from a bank when applying for a mortgage. However, it also means that you won't get as good a deal as someone with a higher credit score. It may not be ideal, but it's not a disaster.
bad
If your credit score is around 300-400, this is considered a “bad” credit score and can negatively impact your financial prospects when buying a home. It's important to note that a bad credit score doesn't necessarily mean you won't be able to get financing. Instead, you may be able to qualify for a “bad credit mortgage” that comes with higher fees, interest rates, and down payments.
How does that affect bank decisions?
Banks take a calculated risk when offering a home loan to a customer. Having an average or good credit score is obviously more favorable to lenders than having a bad credit score. However, while banks may take a chance, it is a risk for them if the customer defaults on their mortgage.
What does “enough” mean?
Most lenders that will usually lend you money will consider a credit score of 550 or above to be good enough to get you a conventional mortgage, so if you're thinking about applying for a loan, make sure your credit score is 550 or above.
If your credit score is poor, how can you improve it?
If my credit score is too low, can I increase it? | How your credit score affects your home purchase
Let’s say your credit score isn’t good enough to get a loan right now and you’ve been turned down by a bank, what are some ways you can improve that credit score so that you can get the loan you need?
Check your current credit score report
The best way to improve your credit score is to first check what you're dealing with. You can request a copy of your credit report from each of the major national credit reporting agencies, including Experian, Equifax and TransUnion. Even better, you can do this once a year for free through the Annual Credit Report website.
These reports can help you understand exactly what's making or breaking your credit score. Factors that help your score include low credit card balances, making on-time payments, having multiple credit cards and loan accounts, and rarely opening new credit inquiries. Conversely, late or missed payments, collections, judgments, and high credit card balances are big drags on your credit score.
Prioritize on-time repayment
Over 90% of major lenders use the FICO credit score, which is made up of five components:
Payment History – 35% Credit Usage – 30% Age of Credit Account – 15% Credit Blend – 10% New Credit Inquiry – 10%
As you can see, it’s your payment history that has the biggest impact on your credit score, so a simple way to improve your credit score is to make avoiding late payments a priority.
Keep your credit utilization rate below 30%
Your credit utilization ratio is the percentage of your available credit that you're using at any given time. It's the second most influential factor used in calculating your FICO credit score, after payment history. Whenever possible, keep your credit utilization ratio below 30% of your available credit. 10% or less is ideal, but 30% is a solid starting point.
Other than simply paying off most of your credit, there are a few other ways to get around this problem. First, you could put your paycheck onto a credit card and pay your living expenses off of it as you go. This won't keep your balance low forever, but it will at least allow you to minimize it periodically. Alternatively, you could request a credit increase so it doesn't eat into your newly available credit.
Limit new authorization holds
Inquiries that can negatively affect your credit score are inquiries for credit cards, car loans, mortgages, and other credit. While applying every once in a while probably won't make a big difference, applying multiple times in a short period of time can negatively affect your score. So, if you're working on improving your credit, avoid applying for new credit for a while.
Improving your credit score is an important goal to focus on, especially if you plan on applying for a loan for a large purchase like a new home, car, etc. Once you take the steps necessary to turn your score around, it can take several weeks or months before you start to see a noticeable change in your score, so it's best to get started right away.
If you have a struggling credit score, there's no quick fix, but if you're ready to buy a home, demonstrating consistent financial responsibility over a long period of time may be enough for a bank to take a chance on you.
About the author: The above article on “How your credit score impacts your ability to buy a home” was written by Kyle Hiscock, a real estate agent in Rochester, NY with RE/MAX Realty Group.
Since starting in 2013, Kyle has published over 150 high quality, in-depth and unique real estate related articles on his Rochester Real Estate Blog on a variety of topics from home sales to mortgages. In addition to high quality real estate related content, there are also many quality articles about the Greater Rochester NY area.
Rochester Real Estate Blog has been recognized by many reputable websites as one of the best real estate blogs to visit and follow. In addition to being recognized as one of the best real estate blogs, Kyle has also been recognized by several organizations and websites as one of the top real estate agents on social media.
About Rochester Real Estate Blog: Rochester Real Estate Blog is owned and operated by Kyle Hiscock of the Hiscock Sold Team at RE/MAX Realty Group. With over 40 years of combined experience, we are happy to share our knowledge and expertise with you if you are looking to sell or buy.
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