Would-be home buyers should read up on the concept of credit scores, which have an enormous influence over their ability to secure mortgages as well as other financial products. So what credit score is needed to buy a house? We’ve broken that down for you in this article.
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- What Is a Credit Score?
- What Credit Score Is Used to Finance a House?
- What Is a Good Credit Score to Buy a House?
- What Is the Lowest Credit Score to Purchase a Home?
- What Is the Fastest Way to Raise Your Credit Score to Buy a House?
- How Do I Fix My Credit to Buy a Home?
- How Long After Buying a House Does Your Credit Score Go Up?
- How to Check Your Credit Score For Free?
- How to Check Your FICO Credit Score For Free?
What Is a Credit Score?
A credit score is a measurement of a person’s creditworthiness.
In short, a person’s creditworthiness is whether they can be trusted to pay back their outstanding debt or not.
There are numerous factors such as income and debt-to-income ratio that contribute to a person’s creditworthiness, but examining the full range of factors tends to be a laborious and time-consuming process.
As a result, there are credit reporting agencies that have used those factors to calculate credit scores for consumers, which serve as a convenient but imperfect stand-in for various parties that are interested in examining their creditworthiness for whatever reason.
What Credit Score Is Used to Finance a House?
Generally speaking, mortgage lenders will look at the credit score called the FICO score, which is based on the FICO model created by the Fair Issac Corporation. This is important because there are other credit score models that can be found out there.
In fact, it should be mentioned that each of the three most important credit reporting agencies has its own particular version of the FICO model, meaning that it is possible for the same consumer to have more than one FICO score.
When a consumer has two different FICO scores, mortgage lenders will use the one that is lower. In contrast, when a consumer has three different FICO scores, mortgage lenders will use the one that is in the middle.
However, if a consumer has three FICO scores but one of the three is different from the others, mortgage lenders will ignore that one in preference for using the two that share the same value.
Finally, if someone has no FICO score from the three most important credit reporting agencies, mortgage lenders will treat them as unknown risks, meaning that they have no chance of securing a mortgage.
What Is a Good Credit Score to Buy a House?
Someone with a credit score between 740 and 850 should be able to secure a desirable mortgage for themselves.
Interested individuals might still be able to get a mortgage even if they fall outside of the 740 to 850 range, but they should expect to pay higher interest rates as well as borrow under more restrictive conditions.
What Is the Lowest Credit Score to Purchase a Home?
People have been able to secure FHA loans with 10 percent down payment even with credit scores as low as 500.
However, most mortgage lenders won’t consider consumers with credit scores lower than 620 to 680 for conventional mortgages, with the exact number seeing a fair amount of variation from lender to lender because of their different willingness to take on risk. Please note that other kinds of mortgages have other minimum credit scores.
What Is the Fastest Way to Raise Your Credit Score to Buy a House?
1. Check the credit score
Check the credit score to make sure that everything has been reported to the credit reporting agencies in the correct manner.
For example, if there is an erroneous report of a late payment, that can be removed for a noticeable improvement.
Likewise, if the credit card companies haven’t been bothering to report on-time payments, checking in with them can prove very useful.
Please note that this method is not guaranteed to be useful for all interested individuals out there because their credit reports will not necessarily contain mistakes and omissions.
2. Paying outstanding balances on credit cards
Paying down the outstanding balances on credit cards and other forms of revolving credit is another useful method for raising the credit score as fast as possible.
If possible, interested individuals should pay down their outstanding balances to less than 30 percent of their credit limits because that should make it much easier for them to reach a higher credit score.
3. Increase credit limits
On a related note, consider asking credit card companies and other issues of revolving credit for an increase to their credit limits.
The chances of success tend to be much higher when interested individuals have been maintaining low outstanding balances by making their payments on time.
Please remember to ask the lenders to do so by making soft inquiries rather than hard inquiries because the latter will have a negative impact on the credit score.
4. Removing negative items on the credit reports
Negotiate with lenders about removing negative items on the credit report such as late payments and collection accounts.
Generally speaking, this means paying those outstanding sums of money at a bare minimum, which could come with other conditions as well.
However, if interested individuals manage to secure a promise of “pay for delete” from the collector, they should make sure that they get a written copy of that promise before they actually make the payment.
5. No credit score makes for an unknown risk
As stated earlier, no credit score makes for an unknown risk, which is no better than a known risk.
Due to this, people who don’t have a credit score might want to get some credit, with the most common choice being a credit or some other form of revolving credit.
In some cases, people might be able to get a considerable boost to their credit score by becoming a co-signer on a credit card belonging to someone with a high credit score.
However, they need to remember that this will come with new responsibilities as well.
How Do I Fix My Credit to Buy a Home?
People can fix their credit scores by proving their creditworthiness.
As a result, it is worth looking at the factors used to calculate the most common credit scores. In short, payment history is the most important at 35 percent weight.
It is followed by credit utilization at 30 percent weight, which would be the amount that has been borrowed out of the borrowing limits. After that, it is the length of credit history at 15 percent weight, followed by both the credit mix and the new credit at 10 percent weight each.
Based on this, it should be clear that the easiest way for people to improve their credit score is to make their payments on time while keeping their outstanding balances as low as possible.
However, they should do their best to keep their financial products open because they will lose the credit history associated with those financial products once they have been closed.
Something that can be particularly devastating if they have been using those financial products for years and years.
Besides this, it is beneficial for interested individuals to have a wide range of financial products, though they shouldn’t be taking out too many financial products within too short a period of time because that tends to be interpreted as a sign of financial desperation.
How Long After Buying a House Does Your Credit Score Go Up?
Once someone buys a house, it shouldn’t take too long before their credit score starts improving as they make their payments on their mortgage.
However, said improvement tends to be slow, meaning that interested individuals might want to do their best to avoid doing things that could lower their credit score more than necessary.
For example, when a consumer applies for a mortgage, that will result in a hard inquiry that will have a noticeable effect on their credit score.
This is the reason that would-be home buyers are supposed to send out their applications within 30 days of one another, which should convince the credit reporting agencies to count those separate hard inquiries as a separate incident rather than a series of incidents.
Likewise, new homeowners might want to be careful about missing out on payments as well as putting too much on their credit cards following a stressful moving process.
Of course, this is an average, meaning that interested individuals should be able to raise their credit scores after the purchase faster than that by following the above-mentioned recommendations.
Otherwise, it is interesting to note that home ownership can boost a person’s creditworthiness by impacting factors besides their credit score.
After all, the ownership stake that they are building up in their homes by making their payments can make for an excellent bargaining chip for further financial products in the future.
For proof, look no further than home equity loans, which wouldn’t exist if interested individuals’ home equity wasn’t valuable.
How to Check Your Credit Score For Free?
Consumers are entitled to get a free copy of their credit report from each of the three major credit reporting agencies every 12 months. Due to this, some people choose to get free copies of all three credit reports at the same time each year.
In contrast, other people choose to get one free copy from one of the three major credit reporting agencies at 4-month intervals, though this makes for more hassle. The simplest solution is to visit AnnualCreditReport.com.
However, there is an option for calling in as well as another option for mailing in such requests. Should these methods fail, interested individuals will need to contact the major credit reporting agencies to learn why their requests were denied.
Those who want to check their credit scores and credit reports on a more regular basis have other options that are available to them as well. For example, there are various credit cards and other financial products that will offer their users the chance to check their latest credit scores for free.
However, since financial products come with further responsibilities, interested individuals should treat said feature as no more than one of a number of benefits that must be weighed against the costs when evaluating them.
Besides this, it is interesting to note that there are free credit report websites such as Credit Karma, Credit Sesame, and Quizzle that can offer interested individuals the chance to look up their credit reports free of charge.
This is possible because these websites will seek to monetize their services in other ways. For example, Credit Karma will look at the user’s credit report before making recommendations for financial products that might be better-suited for their particular needs and circumstances, which will result in them getting paid if interested individuals take them up on those recommendations.
On top of this, interested individuals might want to look up paid credit monitoring service providers such as IdentityForce and Identity Guard, which tend to offer convenient access to credit reports as one of their features.
Often-times, said service providers will offer free trial periods. Something that interested individuals can use to get a look at their credit report as well as determine whether their credit monitoring services are suitable for them or not using firsthand experience.
How to Check Your FICO Credit Score For Free?
The credit score that people look up is the FICO credit score. However, if people are interested in a specific FICO score from a specific credit reporting agency. They should be made aware of the free credit report websites’ limitations.
For example, Credit Karma is exclusively partners with TransUnion, meaning that it offers credit reports from TransUnion and no one but TransUnion. Likewise, Quizzle is exclusively partnered with Equifax, which has similar implications.
Other methods can have similar limitations, but if all else fails, interested individuals should remember that they are entitled to one free credit report from each of the three most important credit reporting agencies on an annual basis.