Why You Should Check Your Credit Score Before Buying A Home
Here’s how your credit score affects the home buying process.
While there’s no strict credit score minimum to get a mortgage and buy a home, there are guidelines most lenders follow. While your credit score is a major factor in buying a home, it’s not the only one. Lenders also consider your employment history, income, and current debts.
And, since credit scores fluctuate, following good credit practices can increase your score and help you get a mortgage or lower rate in the future.
Most first time home buyers are looking to understand how the credit process works. A good credit score can mean the difference between qualifying for a mortgage loan and having your application rejected.
It is important to understand what your credit score means, and how it is calculated. These factors directly influence your eligibility for a mortgage, in addition to your interest rate. Even if you qualify for a mortgage, a lower credit score means you’ll likely be stuck with a higher interest rate. And that high-interest rate will cost you more over the lifetime of the loan.
How does your credit score factor into buying a home?
To understand how your credit score factors into home buying, you first need to understand the credit score basics. You’ve probably heard the phrase “FICO score” in credit card commercials, but here’s what it really is. FICO (which stands for Fair Isaac Corporation) is one of the most common credit scores. It’s used by banks and other financial institutions to determine your creditworthiness.
So, what makes you worthy? The bank needs to believe you’ll pay back your mortgage loan, and that FICO score helps them decide whether or not you’re a risk.
For them, the higher the credit score, = the lower the risk, which means that you’ll enjoy lower interest rates. And, for those with lower credit scores, the opposite is true. Your credit score plays a huge role in determining whether a bank believes you a risk to pay back the mortgage loan or not. If you are deemed a lower risk (because you have a higher credit score), then you will have a lower interest rate and pay less for the loan. But if you have a lower credit score, the opposite will be true.
Factors that affect a Credit Report
FICO scores use several different factors from your credit report. This information comes from the three major credit bureaus (Equifax, Experian, and TransUnion), and it is used to assemble a score ranging from 300-850. Here are the factors that go into your credit score:
- New credit 10%
- Types of credit 10%
- Length of credit history 15%
- Amount owed (30%)
- Payment history (35%)
What credit score is needed to buy a house?
Your credit score plays a big role in your mortgage application, but it is important to remember that it isn’t the only factor. Financial institutions will also consider factors such as your employment history, your current debts, your income, the size of the loan you are asking for, and the total amount you are willing to offer in a down payment.
There are no hard lines when it comes to a minimum credit score. Instead of an exact answer on what is the right credit score to buy a house, most financial advisors use guidelines for home buyers. The guidelines help home buyers to determine if they are on the lower limits of an acceptable credit score or not.