Part 3: Is my credit score good enough?
Understanding how credit works and how that translates into your credit report and why your credit score is what it is can be a gamechanger for your loan terms. Lenders typically provide lower interest rate options for buyers with higher credit scores. This is because homebuyers with a higher credit score are a better credit risk, meaning they're more likely to make their payments on time.
This is a lot to educate yourself on and consider, but it's important to do so because your home purchase may be the single largest expense of your life.
How will I know if I’m ready to own a home?
Is now the time to buy?
Is my credit score good enough?
How much does it cost?
Can I afford it?
Do I have to have a real estate agent?
What is the best financing option for me?
How do I get started?
Your credit score is a tool that credit reporting bureaus use to determine how willing and able you are to repay debt. The more confident a lender is in your ability to repay your home loan payments monthly without being late, the more likely they are to lend to you. Creditors (typically credit card companies and auto loan providers) and home loan lenders will analyze your credit report so that they can get a good idea of how much risk they will assume by lending you money.
Scoring Your Credit
The first part of your credit report that lenders will look at is typically your credit score. Your credit score summarizes your recent 7-year credit history into 3 digits. There are three major credit reporting agencies: Experian, TransUnion and Equifax. Most lenders will use all three to determine which credit score to use. Each score will consider how much debt you currently have, how long you have had that debt, your ability to make your monthly payments on time, and how much your debt balances are as a percentage of the original debt limits. For example, if you have a credit card with a $5,000 credit limit and the balance is $3,900, this means that your balance is 78% of your limit and could hinder your credit score.
TIP: If you have credit cards, carrying a balance of less than 30% of the credit limit will help your credit score.
Negative transactions such as judgements, liens, bankruptcies, or foreclosures can be devastating to your credit score.
What is FICO?
Your FICO score can range from 300 to 850. The Fair Isaac Corporation (FICO) score uses advanced modeling technology to calculate scores for particular types of lending options such as credit cards, auto loans and mortgages.
Each of the three credit reporting agencies use a slightly different formula, but they are all very similar. Because of this, mortgage lenders will look at all three scores and use the middle score as your credit score.
Experian Score: 645
TransUnion Score: 658
Equifax Score: 629
In this scenario, the lender would use your score of 645 from Experian because it is higher than 629 from Equifax and lower than 658 from TransUnion.
Most lenders will have a minimum credit score requirement to qualify. It is more common for lenders to require a minimum credit score of 620 to qualify for a mortgage. Get a quote from a trusted lender in minutes to see if you qualify.
There are credit services such as Credit Karma that can provide credit estimates but these are not reliable options for determining what your true credit score is. Instead, I recommend AnnualCreditReport.com or FreeCreditReport.com. These service providers are free and will give you a copy of your full credit report from TransUnion, Experian and Equifax at no charge. They may also provide the option to give your credit score for a nominal fee.
The fastest and most reliable way to learn more about your credit report, your credit score, and how to raise your credit score would be to simply contact your trusted mortgage banker.
The answer to question #4: How much does it cost to buy a home?
Best advice for growing your credit score would be to simply live within your means. Do not spend more than your net earnings (how much you take home after taxes, savings and healthcare expenses are deducted.
Ready to get prequalified? Contact me and follow my blog at www.thehomeloanhub.com or subscribe to my newsletter and leave your thoughts.
Terry Roberts is a U.S. Marine Corps Veteran and specializes in residential mortgages, including new construction, conventional, FHA, and VA home loans. He has helped more than 10,000 clients start the homebuying process across America.
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