Three simple digits. They may be all that stand between you and buying your own home or continuing to rent. Known as your “credit score,” those digits reflect how risky it will be to lend you money. The score may also impact other aspects of the home buying process as well.
How is your credit score calculated?
The information these agencies collect on you and your bill paying history ends up in the hands of the Fair Isaac Corporation (or, FICO® for short), one of the nation’s top credit scoring companies.
According to FICO, top lenders rely on your FICO or credit score to determine your credit risk and how much they will charge you for the money you borrow.
FICO’s score calculation is complicated and very secretive. What they end up producing, however, is a score from each of the reporting agencies.
“Mortgage lenders usually take the middle score” from this subset, according to Craig Anthony at investopedia.com.
“For example,” he continues, “if your credit scores from the above agencies are 710, 690 and 610, the lender typically makes its decision based on the 690 score.”
To learn more about how FICO determines your credit score I’d encourage you to ‘go straight to the horses mouth,’ so to speak, to myfico.com.
What is considered “good enough” credit for a mortgage?
FICO Scores can range from a low of 300 to a high of 850. How common is it for someone to have a perfect score? According to FICO, only about one and a half percent of Americans with credit scores have a perfect 850!
If you have a 704 credit score you are in good company! In 2018, FICO announced that the average score in the United States reached an all-time high of 704!
So, getting back to my question. What’s the magic number you’ll need to buy a house?
That all depends on the type of loan you’ll be pursuing.
- FHA – 580 and above to qualify for the 3.5 percent down payment and 500 and above with a 10 percent down payment, but these are very hard to get approval on and actually close.
- Veterans Administration (VA) – Most VA lenders want to see at least a 620 score, although some lenders may approve a borrower with a 580 score.
- USDA Rural Development – 640 and above.
- Conventional loans – You truly need to shoot for a 700 and above
Since requirements can and do change from time to time, use the above minimum scores as a general guideline and consult with a lender for current requirements.
How does a low credit score impact the process of buying a home?
If you find your credit score on the borderline of being able to qualify for the loan program you are seeking to obtain, you may run into the following problems along the road to homeownership.
1. You’ll pay more for your house payment each month
Take a look at FICO’s Loan Savings Calculator to determine how much money you can save by raising your credit score before applying for a loan.
2. Home insurance rates are higher for those with poor credit
If you’ve got a low credit score, you’ll pay more for homeowner’s insurance.
“People with poor credit pay at least twice as much as people with excellent credit in 37 states and Washington, D.C.,” according to Laura Adams, InsuranceQuotes’ senior analyst.
Since for many borrowers insurance is one of the four components of your mortgage payment (principal, interest, taxes and insurance), a higher premium will impact how much you pay for the home each month.
How quickly can I raise my credit score?
The first step to take when trying to raise your credit score quickly is to look for errors in your credit reports. You are entitled to a free copy of your reports every 12 months, from all three credit reporting bureaus.
The Federal Trade Commission recommends that you order these reports from annualcreditreport.com, the only agency authorized by the U.S. government.
Items to look for in your credit report include:
- Personal information – Ensure that your name, address and Social Security number are accurate.
- Check all listed account numbers for accuracy.
- Check that there are no accounts listed as closed which are actually open.
- Look for accounts that are incorrectly listed as delinquent.
You will find more tips on what to look for in your credit report online, at consumerfinance.gov. If you find errors, dispute them according to the bureau’s instructions. These are listed on each credit report.
In the meantime, don’t open any new credit accounts. Since the credit bureaus don’t know how you’ll use this credit, they consider you a higher credit risk with new credit and it may result in as much as a 10-point reduction in your score.
Don’t close any credit card accounts, either. The lack of installment credit makes you appear riskier.
Finally, the easiest way to accomplish this quickly without you having to do all the homework yourself is to contact a lender who can do a rapid rescore for you. My preferred lender, Russ Tanner, PrimeLending, has worked miracles with people that were borderline in getting a loan or the rate they wanted and in a matter of a couple of weeks I’ve seen buyers that he’s worked with increase their scores 35-55 points. He uses a credit scoring model to make sure that you are paying down those debts where they would give you the most ‘bang for your buck’ for the quickest increases on your credit score! The best part, it costs you nothing to work with Russ on doing a rapid rescore because obviously he’s hoping you might consider letting him do your home loan for you when you are ready and able to buy!
Can you get a loan with no credit score?
Dave Ramsey, financial guru, touts the idea of getting a mortgage with ‘no credit score!’ Now he admits, no credit is not the same as low credit, but in his blog post, How to Get a Mortgage With No Credit Score, ” he makes some comments that, while possibly true, are not the reality for most people today. Don’t know how practical the advice happens to be. In his blog post he states, “the qualifications on an FHA loan are low—so low, in fact, that if you have no credit history (or a low credit score) and at least a 3% down payment, you’ll more than likely qualify.”
Okay, but what does that mean? Most consumers will hear that and think, “hey, I don’t need credit. Dave Ramsey said I can get a loan anyway!!” Here’s the rub, so to speak. While getting a mortgage without a credit score is more difficult, per Dave Ramsey it’s not impossible. They offer a lender that will do manual underwriting. One such lender is Churchill Mortgage. In my zeal for more information and details I reached out to Churchill Mortgage and this is what they conveyed to me.
The LO (loan officer), Jesse Phillips, commented to me, “It is a great program we have and typically the interest rate is around where rates would be for someone with a credit score. A 10 or 15 year mortgage would have the interest rate in the low 4s and a 20 or 30 year mortgage would be in the mid 4s at this time. The main stipulation is that we require a 12 month history of alternative lines of credit which would include rent, utilities, car insurance, cable, cell phone, etc. unfortunately we do run into some people in their early 20’s that that still live with their parents and their parents pay all their bills and that is not a situation we can do because we would not be able to prove a history of paying bills on time.”
So the downside is that while the rates might be comparable, to get the best rates you’d have opt with a 10 or 15 year mortgage, which greatly increases your payments and in turn it reduces the amount of house you can qualify for and afford. Note too, especially first time home buyers, that as Jesse comments that you’ve got to prepare a year out to make sure you are on your own, creating that paper trail to show you had rent, utilities, car insurance, cell phone bill, etc.. that you paid on time. No credit loans mean not FICO score, but what this tells me is that you still need to display to the bank characteristics of ‘having credit,’ which means…
Pay your bills on time
Since your payment history accounts for 35 percent of your credit score, late payments are brutal on your credit score. Make sure you meet those payment deadlines.