Let’s say you’ve just begun searching for a new home. While there is a lot to consider, your credit score and ability to qualify for a mortgage loan at a rate you can afford is one of the most important factors.
While you probably understand that a good credit history improves your chances of getting a loan – because it shows how likely you’ll be to repay the loan – understanding the meaning of your score can be challenging.
Let’s take a closer look:
What is My Credit Score?
Each individual has his or her own credit score. Borrowers with high credit scores get lower interest rates than those with low credit scores.
The FICO credit score is among the most common scores used by lenders to determine if you’re worthy of a loan. FICO takes into account different variables on your credit report, including:
- History of Making Timely Payments
- Amount Owed
- The Length of Your Credit History
- The Types of Credit
- New Credit
FICO gets its information from the three major credit bureaus – Equifax, Experian, and TransUnion – to compile your score. Scores range from 300-850.
According to Experian, the average credit score in the United States is 699.
Why is My Credit Score So Important for Buying a Home?
A good credit score is not only vital for getting a low mortgage rate, but it determines if you can get a home loan at all. Again, lenders prefer a credit history of timely payments, little debt, and other positive variables.
Note: It’s possible to qualify for a mortgage if you have a lower score, but with high income and low levels of debt. Likewise, you could be turned down for a mortgage loan if you have a good credit score, and your income is lower and you have high levels of debt.
What Credit Score is Needed to Buy a House?
Mortgage experts say that a score of 620 or below greatly decreases your chances of getting a loan. A score of 740, meanwhile, will qualify you for the best rates from most lenders.
A difference of 1% in a mortgage interest rate can make a dramatic difference, both in your monthly mortgage payment and how much you pay over the lifespan of your loan.
What Can I Do if My Credit Score is Low?
A good rule-of-thumb is to check your credit a year before buying a house. This gives you time to clean up your credit, as well as to dispute and correct errors on your credit report.
The good news is that all three credit bureaus make it easy to dispute errors. If everything is correct, then you should begin the process of paying down balances – on time, and avoid taking out new lines of credit (such as a car, or student loan), and let time to do the rest. Multiple new accounts can negatively affect your credit score.
Also, if your credit score makes it difficult to qualify for a conventional mortgage, you can also apply for a Federal Housing Administration (FHA) loan that’s insured by the government. An FHA loan is beneficial for people with lower credit scores, or for those who pay a significant portion of their income on housing.