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Your credit score has a big impact on whether you’ll be able to buy a home. From being able to get approved for a mortgage to your interest rate and the amount of house you’ll be able to afford, your FICO credit score matters when you’re shopping for a home.
What Your Credit Score Means
While there are different kinds of credit scores and different ways to be assigned a credit score, most lenders use FICO scores from the Fair Isaac Corporation. Data from merchants, landlords, and creditors is compiled by the credit scoring system to assign you a personalized FICO score between 350 and 850, based on how well you keep up with your finances.
The higher your score, the more creditworthy you are, and the better chance you’ll be approved for a home loan with good terms and a low- interest rate.
How Your Credit Score Is Determined
Several aspects go into determining a credit score for you. The first is a measure of your financial responsibility with rent payments, car payments, credit card payments and balances, and even utility bills.
Next, mortgage lenders usually look at your FICO score from the top three credit reporting agencies, Equifax, Experian, and TransUnion. Scores values can vary slightly between the three, so most mortgage lenders will make a mortgage decision for you based on the middle of the three scores, discarding the high and low outliers.
The last point to keep in mind, your score could be artificially lower if there are errors on your credit report. Always request your credit report and ensure there are no errors before applying for a home loan.
What Factors Affect Your Score
There are five weighted factors that go into your FICO credit score.
Payment History (35% of Score)
Paying your bills on time is the most important factor for your score. Also, ensure you pay at least the minimum monthly payment by the due date for any credit cards you have. Missed or short payments can negatively impact your score.
Credit Utilization (30% of Score)
To maximize your score when you are preparing to buy a home, you should aim for a credit utilization of about 10% to 20% of your available credit. Your score will be negatively impacted if you have too high a debt-to-credit ratio. However, your score will also be negatively impacted by not using your available credit.
Length of Credit History (15% of Score)
Your credit score can improve over time with a credit history of on-time payments and regular credit use. It usually takes ten years of good credit history to achieve a score above 800, and maxing out the scale at 850 can take more than 20 years of good credit management.
New Credit (10% of Score)
Applying for too much additional credit in a short span of time can negatively impact your credit score. A couple of applications per year for new credit cards or a new loan is not unusual, but significantly more new credit applications can impact your score, especially if you are trying to buy a home.
Types of Credit (10% of Score)
The final factor that affects your score is the types of credit you maintain. A variety of credit types, such as a couple of credit cards and an auto loan, can help improve your credit score and demonstrate to lenders you are ready to take the plunge into homeownership.
What Credit Score Is Needed to Buy a Home
The better your credit score, the better your options for favorable loan programs and interest rates will be. However, there is a ground floor. Scores below 500 indicate a lack of credit history or bad credit. Between 500 and 579, you may have access to poor credit score mortgage programs, such as that of the Federal Housing Administration’s 10% down program. With a score above 580, you have a couple more options, such as the FHA’s low-down-payment program of 3.5% and some VA home loans.
Above 620, your options will begin to open up, with better interest rates and more choices for loan types, including VA loans, FHA loans, and conventional loans. With a score above 700, you will have access to “good” credit score mortgage programs, with even better rates, and you will also be able to apply for jumbo mortgages.
With a FICO score of about 740 and above, you will usually have access to the best interest rates available, while also saving money on private mortgage insurance if your down payment is less than 20% of the purchase price.
How to Improve Your Credit Score
As you can see, the better your credit score, the more options you have as a home buyer. If your credit score is on the line between fair (580-619) and average (620-699), or between good (700-739) and excellent (740-850), it’s worth the effort to work to improve it.
Your credit score can change by as much as 20 points per month. Paying bills on time, paying down credit card balances, or going through your credit report and fixing errors, can all have a big impact on your credit score and your ability to buy a home.
Your FICO credit score is a key factor when buying a home. A better score can help you get approved for the mortgage you want, with a better interest rate, which impacts how much house you can afford overall. Best of all, your credit score is something you can control, by managing your finances carefully, paying down credit card debt, and ensuring your credit report is free of errors.
Our advise is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.