What Credit Score do you Need to Buy a Home!
Knowing your credit score can be the key to buying a house. This is a lifetime goal that most people break sweat daily trying to fulfill. However, not everybody can save enough money required to purchase a home on a cash basis. Mortgages are especially handy if you want to buy a house but do not have enough liquid cash. Financial institutions, like banks, offer supplementary options to enable buyers to acquire their dream homes. Nevertheless, it’s not always a guarantee that everybody applying for a mortgage will qualify for one. No! Financial institutions have systems put in place to help them identify customers worthy of receiving financing.
3 Main Numbers can change your life
One of the major tools banks and other financial institutions use in evaluating a potential beneficiary of financing is their credit score. What is a credit score you ask? Your credit score is a set of three numbers ranging from 300 – 850 that signpost your creditworthiness; meaning it indicates whether you will be able to pay off a loan, as scheduled if given one. Usually, a higher score indicates good credit behavior and increases your chances of getting a loan, but does not qualify you for one as there are other factors that the institutions consider.
How is a Credit Score Calculated?
Credit scores are calculated as FICO scores; a formula developed by Fair, Isaac, and Company (FICO).Components of the scores are available to the public, but not the specifics of how it is arrived at. The formula is very strict and takes into account some factors in order of their importance as follows:
Does the applicant make timely payments of previously owned debt?
FICO uses your past long-term behavior to predict your future long-term behavior. FICO is especially strict on installment and revolving loans and considers recency, frequency, and severity of reported missed payments valuable information in categorizing loan applicants. Individuals who miss out on installed loans suffer fewer negative impacts than those who miss out on revolving loans.
Amounts Owed/ Credit Utilization
How high is the balance of each of credit line held by the applicant?
FICO views borrowers who exhaust limits on their credit cards as having poor credit managers. As a borrower, it is advisable that you maintain low credit balances. FICO points out that people with low credit utilization, usually below 6%, tend to have better credit scores. Credit utilization is measured across all cards held by a borrower.
Length of Credit History
How long has the applicant been using credit?
Here, FICO will look at your timestamps from the day you received financing, your payment
schedules and the last time there was activity on the account you hold. Longer credit history provides enough information to predict long-term future behavior. It is the key tool that FICO will use to determine your ability to hold an account for long periods and still manage to payoff. Long credit history ensures better FICO scores. However, individuals with a short credit history can still get high credit scores if they have low utilization ratios and haven’t missed out on previous payment schedules.
Has the applicant opened any credit accounts lately?
You should not open many credit accounts at once! Such a behavior indicates that you were, at one point, in a financial trouble and needed heavy financing hence a lot of credit. FICO encourages consumers to apply for and open new credit accounts only when necessary. Consequences of making a contrary decision will lead to a lower average account age, which in turn lower your potential FICO scores.
Types of credit/ Credit Mix
What combinations of retail accounts, credit cards, mortgages and installment loans does the applicant have? Experts say that repaying variety of your debts indicate you can handle different
types of credit. Borrowers with a good mix of installment loans and revolving credits provide less risk to lenders.
Amounts owed and credit history form 30% and 35 % of the total score, respectively, while length of the credit history accounts for 15 %. Types of credit used and new credit each account for 10% of the score. These fractions are not a market standard and they can vary from one borrower to another.
How do Financial Institutions get these Details?
You might be wondering where financial institutions get all these pieces of information. Simple! They look at your credit report, which is a document detailing all of your previous payment patterns. Your credit report shows:
- Debts held in the past
- Payments missed
- Payment behavior; say if you had two loans to pay off, which one did you forsake to pay the other
All these details describe your behavior and go toward obtaining your credit score.
You can improve your credit scores before applying for a loan and get the best rates.
First and foremost start by sprucing up your credit report. Request for a copy from the three major credit reporting agencies – Equifax, TransUnion and Experian; you are entitled to a free copy of your report card once a year. Examine and analyze them for incomplete information and inaccuracies that might lower your credit scores. These include: incorrect dates, missing payments, misquoted payments etc. File a dispute with the creditor and credit reporting agency from which you received your copy should you find any incomplete or inaccurate information.
Making your payments on time can also increase your credit score. As you already know, your credit history accounts for 35% of your total credit score. Late payments stay on your record for seven years and may hurt you in the future. Timely payment reduces the impact caused on the score over time.
Pay your debt down
Therefore it will improve your credit score. Your credit utilization ration contrasts the amount of debt to the amount of available credit. For example, if you have $5,000 in debt and $15,000 in available credit, your credit utilization ratio is 33.33 percent. Most lenders like a credit utilization ratio of 35% or less, do not open up new credit accounts to increase your credit utilization ratio; it will lower your score (new credit).
Limit credit applications to lower your credit risks. Although FICO recognizes credit accounts opened within a 45-day span as one application, opening multiple credit accounts within a short time can impact your credit score by 10 percent.
One of the companies to find out your credit score is Credit Karma. They can also be used to monitor your credit score to ensure that you are on top of your score at all times.
Minimum Credit Score to Buy a House
Although credit score is the sole tool used in determining your creditworthiness, it is difficult to stone-mark a specific number to represent the minimum credit score because different financial institutions use different approaches to arrive at your credit score. This fact is further made difficult if the loans are insured or underwritten by government organizations. The minimum score in the market ranges from 580 – 619. However, the score your lender will accept as the minimum will depend on several other issues including your salary history, payment history, scores other lenders in the market are accepting, current economic atmosphere and your current wage.
Fannie Mae and Freddie Mac
Since, these are two government-supported lending companies, most lending
companies in the market usually bench mark what these two are doing and try to come up with similar scores for their clients. For instance, in 2009 Fannie Mae raised her minimum credit score for conventional loans from 580 – 620. Individuals with 20% down payment got rejected if their score was below 620.
What is the Best Credit Score to Buy a House?
The current average credit score in the market ranges from 620 – 699. Within this range the interest rate you can lock down varies greatly. Credit scores above 720 are the best. With such like credit scores, your interest rates drop significantly and you may end up having the lowest rates in the market. Although the rates difference may seem small for someone with an average credit score, they really weigh out in the long run. For instance, the difference between a 3.5 percent rate and a 4 percent rate on a $200,000 loan is 56.74 per month. If the loan spans 30 years then that is a difference of $20,462.40.
Secured Credit Card Companies to Raise your Credit Score
Consequently, secured credit cards, as their name suggests, require a collateral (usually cash deposits equal or larger than the amount of initial credit limits). Issuers of these cards report behaviors to consumer credit bureaus resulting to negative or positive impacts depending on how you use the cards.
Some of the companies offering a secured credit card to raise your credit score include:
Capital One® Secured MasterCard®
Capital One® gives its card holders credit limits higher than the collateral they placed in their
initial deposit. Qualifying for a credit limit is a smooth process and card holders also don’t pay
for foreign transactions or annual fees. You also get unlimited access to your credit score and
Capital One CreditWise, which helps you maneuver different scenarios and predict changes in
your credit score.
U.S. Bank Secured Visa Card
Their biggest advantage is that your deposits are held in a savings account earning interest while
you gain credit. You can contribute up to $5000 which is the highest credit limit for the secured
cards. They allow you to reevaluate your credits and see if you qualify for an unsecured credit
card, making the switch simple and time efficient.
Discover it® Credit Card®
Therefore, this is one of the few companies that offer cash-back rewards to its card holders. You get 2% discount on all purchases made on gas and restaurants plus 1% discount on any purchase.
Discover it® will go through your credit card statement after seven months to determine if you
qualify for an unsecured credit card. The card requires you to deposit an amount equal to your
desired credit limit. For instance, you deposit $5000 if you want a credit limit of $5000.
USAA Secured Card American Express®
This credit card is especially popular with military servicemen. Its core attribute is, deposits
made to the secure cards are invested in an SC with variable interest rates. This approach allows
your money to grow while you build credit. You get your deposits back once you are ready for
an unsecured loan.
The Best Way to Raise your Credit Score!
The Algorithm used by the Credit Bureau’s to figure your credit score are complicated. Some of the lending institutions have programs called Rapid Rescore. As the name suggests this is a process by which a lender can pull your score and analyse it for ways to raise your score rapidly. They have figured out how to analyse the Algorithm of your credit score. It might tell you to pay a certain credit card down to a certain amount of money. It will tell you to pay a credit card down to $23.00 and this will raise your score 20 points. If those 20 points makes it so you can get a loan then this is a great option, if not then you need to consider another way.
Besides, taking out a secured credit card is a slow process to raising your score and it can come at your own expense. Say you take out a card for $300.00, to get a good score from this card you can only charge $30.00 as the high value on it, otherwise it will actually lower your score again.
Best Way to Raise your Score
However, the best way to raise your score is to go to a bank and take out a secured loan. The bank will agree on an amount of money say $1,000.00. This money will in essence secure your loan for $1,000.00 from the bank. Each time you make the payment, the bank will be reporting to all three credit bureau’s that you made your payment on time. Make sure to find a bank that will score you on all three credit bureau’s otherwise it will not work, with just one credit bureau reporting you will have two credit bureau’s not reporting the change. Just a heads up, while credit unions are a good choice for car loans, they are not good for raising your score, because they typically only score you to one credit bureau company.
For more information contact:
Pam Hoefert at RE/MAX Professionals Inc
606 W 33rd St. Sioux Falls, SD 57105