How Credit Scores Affect the Home Buying Process
When beginning the home buying process, prospective owners will undoubtedly have several financial considerations to ponder. One very common consideration homeowners may come across is applying for a home mortgage. Buying a home calls for attention to an applicant's credit score. With this information, home buyers will understand how their credit score is used throughout the home buying process.
How Many Credit Scores Can People Have?
Although many people are familiar with the idea of a credit score, they may not know precisely how many credit scores are available. There are three reporting bureaus: Experian, Equifax, and TransUnion. Each of these bureaus generate a score ranging from 300-850 based on their own records, which is called a Vantage Score. Fair Isaac Corporation is an entity independent of the reporting bureaus that builds credit scores, also set from 300-850, known as FICO scores. FICO scores are typically used by lenders to approve an application for a mortgage. Since the company regularly releases new scoring models based on updates or industry-specific conditions, one person may have dozens of FICO credit scores.
Do Lenders Use Different Scores for Approving Mortgages?
Since there are different scoring models, it is not surprising that mortgage lenders might use another score than one designed for credit card or automobile purchases. FICO is currently on a scoring model known commonly as FICO 9. However, most banks, credit unions, and other lending institutions have yet to adopt the model to approve a variety of loans. Scoring models may emphasize different aspects of a person's credit report, such as history, total debt, or timely repayment. As such, the scores may vary significantly from one model to the next, even if the scores come from information on the same credit bureau.
Fair Isaac claims that the scoring model preferred for mortgages depends on the reporting bureau. However, it says that lenders most often use FICO 2, 4, or 5 to determine this aspect of an applicant's creditworthiness. In an application, the lender may choose to average the three scores, take the middle score, or accept the lowest score when determining mortgage loan options.
What Is the Minimum Score Needed for a Mortgage?
The credit score only tells the lender a few things about the potential borrower's interest and ability to repay their debts. Lenders have some leeway in setting the limits of the credit scores they prefer or require from mortgage applicants. Most conventional loans conform to the requirements set by Freddie Mac and Fannie Mae, government-run organizations that buy qualified mortgage debt. Lenders offering conforming loans usually require buyers to have a credit score of at least 620 in order to have a successful application. Loans backed by the FHA may be approved with credit scores as low as 500. However, applicants with credit scores in the 500s could be required to make a larger down payment or shoulder other fees.
Which Factors Determine Who Gets the Best Loan Terms?
Having a credit score that is good enough to get a mortgage is only the first step. Once people have the minimum score needed for basic approval, the lender will analyze the level of their score to determine the kinds of loan terms they can qualify for. Many aspects of the loan are dependent on the applicant's credit score, such as:
- required assets in reserve
- minimum down payment
- mortgage interest rates
- how much to pay in mortgage insurance, if required
- maximum debt-to-income ratio
Those who have higher credit scores will gain access to more loans offered by the lender. For example, someone with a credit score in the 600s might be able to qualify for a loan, but have to make a larger down payment and pay a higher interest rate.
What Can Home Buyers Do to Increase Their Credit Scores?
When people are preparing to buy a home, they should be careful about any decision they make that could affect their credit. The best thing they can do is to obtain a copy of their credit reports and dispute any inaccuracies, with time for mistakes to be wiped off the report before the application.
No Late PaymentsYou’ll need to be extra careful that you pay all of your bills on time because late payments and non-payments are two of the biggest credit score wreckers. Try to keep your credit card balances to within one-third of your limit. If you have some extra cash, put it toward paying down some of the highest balances.
Resist the Temptation to Get New CreditThere are probably lots of things you’d like to purchase for the new home and it seems logical to get a credit card to take care of those purchases. Resist the temptation until after you close on the house because any inquiry will ding your credit score. Lenders are put off by borrowers who are taking on more debt while asking for money.
Decrease Your Debt, Raise Your Income, or BothThe lender’s underwriter will look at your income compared to your debt by using a calculation known as your debt-to-income ratio (DTI). If it’s too high you may not get the loan. The best way to prevent this is by paying down debt, making more money, or both.
Having the right credit score to get a good mortgage can be a difficult thing for Big Lake home buyers to determine, especially once they understand how many scores they truly have. By answering these questions, people will know how their credit score may be used, and what kind of score they need to succeed.