How Credit Scores Impact Home Buying
Credit scores impact home buying because mortgage lenders have a threshold they’re willing to look at on a per loan program basis. The minimum credit score required to get a mortgage loan a middle credit score of 620.
Credit scores come in a range from as low as 300 to as high as 820. The higher the credit score, the better the combination of rate and costs, the lower the credit score, the worse the rate and costs.
Your credit score becomes vitally important when buying a house because it’s the most accurate depiction for creditor (mortgage lender) to determine how likely you are to be late on a monthly debt obligation. It’s an assessment of risk of the probability of a delinquency within the next 30 to 60 days. When your credit report is pulled by a mortgage lender, it’s a rolling average of your debts and credit score 30 days ago.
Buying A House: how lenders view credit scores when buying a house.
1. Payment History-35% impact on the credit score
*Note: a mortgage Is the strongest medium for raising or lowering a credit score.
This involves simply paying debts on time and in full and has the highest impact on your credit score. Late payments, collections, judgments, charge-offs all pull a credit score down. In fact nothing will make your credit score go up or down like a mortgage loan will.
2. High Credit Balances-30% impact on the credit score
The whole idea is to make sure that your credit card balances never exceed 30% of the total allowable monthly credit line. That means if you have a credit card that has a total line amount of $500, you don’t want to ever exceed $150 in balance on that card.
3. Credit History-15% impact on the credit score
Credit history involves the amount of time you have had credit for. The longer the time credit has been open and active, the better weighting on your credit score.
4. Credit Types-10% impact on the credit score
You want to have a mix of credit. The idea is to diversify which involves having accommodation of an auto loan, credit cards and a mortgage or two. This presents a stronger credit profile to the credit bureaus and they will reward you with a better credit rating.
4. Inquiries-10% impact on the credit score
Your credit score will not go down by applying for a mortgage.When people get into trouble is when they start applying for multiple different types of credit in a short period of time. For example applying for a mortgage, then applying for an auto loan, then applying for a credit card, and then applying for a utility. Different types of credit all pulled together within a 30-45 time frame is what affects the credit score negatively.
Credit scores impact home buying because they have an influence on the interest rate and the overall characteristics of the loan program.
For example. Borrower John has a credit score of 800 and is taking out a 30 year fixed-rate mortgage and is getting an interest rate of 3.75% with no points.
Borrower Ralph is also buying a house in his credit score is 640 and is also taking out a 30 year fixed-rate mortgage. His interest rate with no points is 4.375%.
The .625% difference in interest rate over 30 years is $56,000 because borrower Ralph’s credit score is significantly lower.
Credit scores influence on interest rates:
740 credit score or better= best possible interest rate available,most competitive combination of rates and fees
725-739 credit score=good interest rate, competitive combination of rates and fees
700-724= market rate, normal combination of rates and fees
680-699= higher cost interest rate, higher combination of rates and fees
620-679= highest interest rate, highest combination of rates and fees
Steps To Buying A House you can take for improving your credit score.
Start with having a conversation with your lender:
- Ask your mortgage lender what you can do to improve your credit score. If your credit score needs significant help you can also contact a credit repair company. Most credit card companies are flexible and can be quite effective to raising your credit score to help you buy a home.
- Contact the creditors yourself and asked them to correct the credit report if there is any items being reported erroneously. Be nice and courteous and many times and get items removed from your credit report simply by making an inquiry.
When you are involved in the home buying process. Following is a list of things to adhere to:
- Do not under any circumstances use your credit for purchasing anything. This does sound crazy, but the last thing you want to worry about is jeopardizing your credit score or monthly debt obligations when you are in the process of buying a house.
- Avoid bringing current any past collections or previous derogatory credit items. Do this before you enter into a real estate purchase contract. You want to make sure your credit score is not affected, negatively.
- Avoid closing credit lines. People think you need to close your credit card account if you’re not going to use it, do not. Simply do not use the card but keep the credit card account open.
- Avoid maxing out credit cards. Ideally you don’t want your credit card to ever exceed 30% of the total allowable credit line.
- Consolidating were transferring credit card balances from one account to another is also not a good idea. Do this when you are not going to be in the process of buying a home.
- Avoid cosigning on another individual’s credit account. This includes, but is not limited to mortgages, personal debt obligations like loans and auto loans and of course credit cards.
- Make your monthly debt obligation payments as though you normally would. Stay current on all of your credit cards and monthly revolving debts just as you normally would.
Home Buying Tip: Government loans such as FHA loans, do not discriminate on interest rate the way conventional mortgage loans do. Meaning a home buyer with a 640 credit score is going to be able to obtain the same interest rate and fee combinations as someone with a credit score of 725.
If you are thinking about buying a house, make sure your credit scores are in check. Get a copy of your credit report from the mortgage lender. Discover how credit score impact home buying and what steps you can take to ensure good credit.