A good credit score is your ticket to mortgage success. If you wish to buy a home with lower monthly payments, your credit score will largely determine your financial future as a homeowner.
Lenders use credit scores to determine a borrower’s credit risk. Aside from your assets and income, the credit score tells your lenders how well you have managed debts. It offers information and insight on how timely you settle your bills and other payables.
The most widely used credit score comes from FICO (Fair Isaac Corp.), using a formula based on your credit reports supplied by the 3 national credit bureaus (Equifax, TransUnion, Experian).
FICO calculates credit scores based on payment history (35%), credit utilization (30%), credit age (15%), a mix of accounts (10%), and recent applications for credit (10%).
So if you are settling your bills on time, using a lesser amount than your credit card limit, maintaining a long but good credit standing, and have other types of installment payments, you will likely score well on FICO.
Credit scores range from 300 to 850. Ideally, the higher your credit score, the more likely you will be given a lower mortgage rate. Homebuyers applying for a conventional loan should aim for at least 740 or more, to show excellent creditworthiness.
Scores between 675 to 700 are still considered good. However, a 100 point drop from excellent to good and fair scores may increase the mortgage rate by 1 or 2 percentage points or more. In a 30-year fixed mortgage, this difference would mean thousands of dollars.
Moreover, if your score falls below 625, the rates will be even higher. This is considered a bad score and may not be eligible for conventional loans. Mortgage experts recommend improving low credit scores before applying for a home loan. In some states, a bad credit score also equates to higher home insurance costs.
Other lenders rely on VantageScore, another credit scoring model. It was developed by the three credit bureaus. 700+ is a good score, while 750 to 850 are considered excellent.
Both FICO and VantageScore calculate the numbers based on the same credit reports, so the scores would still be low for bad credit histories. However, FICO is still the preferred score for Fannie Mae and Freddie Mac.
If you have a low credit score, you can increase it by paying off existing debts, increasing credit card limits to keep a lower balance, settling bills on time, and reporting possible errors on your credit report.
Building a good credit score means you have to eliminate most of your debts or reduce the balance to at least 30% or less. Work these things out and gradually, your score will improve.
To maintain a good credit score, you must refrain from applying for another type of loan while trying to qualify for a mortgage.
When you think you are ready to buy a home, do your mortgage shopping within 14 to 30 days. Too many inquiries will also lower your existing score.
There are credit card companies who provide FICO scores for free. Monthly credit card statements may already contain FICO scores. You can also check your credit score for free on some finance websites.
In some cases, lower scores can still qualify for a mortgage, such as VA loans and government insured loans. However, these may come with expensive loan origination fees and the qualification slots may be limited.
A good credit score is still the best way to secure a low mortgage rate. Equally as important, is buying a home that offers you the most value for your money. There are lots of affordable homes here in Bryan County, Oklahoma. Let me help you find your dream home, call or email me today.
Brian A. Allen is a Realtor and is full of energy, excitement and zeal for every sale. He spent most of his career in marketing and now applies that skill set to the homes his clients want to sell. Click here to learn more about Brian A. Allen