In the past, you could save enough money to buy a house. But now, it is not enough, and you need to become a borrower in a bank or other company with the help of a financial advisor.
Buying a home is still a dream for many, but with the skyrocketing cost of living, those days are virtually gone. The homebuying process is not even in mind thinking about the cost and cash needed for it.
Unless you are extremely wealthy, in order to buy a house you have to apply for a mortgage and get approval, which is a type of long-term home loan. But what can you do to get the best mortgage you can? Well, when considering potential home buyers, mortgage lenders rely on the applicant’s
credit scores to tell them if they’re a good investment.
Ultimately, your credit score is an important part of the home-buying process.
A credit score is a three–digit number that reflects your creditworthiness.
What is a good credit score to buy a house?
There is no definitive answer to this question since it varies from one lender to the next.
Read on to find out more about credit scores, so you can arrange home buying plans.
What is a Credit Score?
Credit bureaus are companies that collect and maintain information about consumers‘ credit histories. This information is used to help lenders decide whether to grant consumers credit and at what interest rate. They also use your current finances and prior financial history to calculate your credit score.
There are three major credit bureaus in the United States: Experian, Equifax, and TransUnion.
This includes if you’ve had any credit cards, if you’ve made the payments on time or if you have accumulated debt. It also includes what loans you’ve gotten and how you paid them off, your debt-to-income ratio, and your total income.
What Impacts a Credit Score?
Credit bureaus assess several criteria when calculating credit scores. They use credit reports to obtain critical information.
There are many factors that go into calculating a credit score. Some of the most important factors include how long you‘ve had credit, how much credit you have available, how much you owe, credit card minimum payments, and how often you‘ve missed payments.
It is basically your entire credit history and financial health. In detail,
35% of your score is payment history, 30% is your total debt, 15% is the length of your credit history, 10% is the types of credit you have, and 10% comes from new credit.
What Credit Score Do You Need to Buy a House?
The credit score that someone needs to buy a house as a first-time homebuyer depends on the type of home loan that you are trying to get. You do not need to have perfect credit requirements, and you do not even need to have good credit to buy houses. So, the minimum credit health that is required to qualify is
580, considered as “fair”.
You can choose loan programs that match your minimum credit score requirements. Different loan types and loan programs require varying minimum credit scores.
We will explain the type of loan and help you pick affordable home loans for you.
Conventional Loan
If you decide to try and get a conventional mortgage loan from a private investor, you would generally need to
have a minimum FICO score of 620. Conventional mortgages require the highest credit score because they are not insured by a government agency.
Qualifying for this loan would mean that you could more easily qualify for a lower down payment as well as lower interest rates. These loans provide a safer investment for lenders. Therefore, lenders are more willing to offer competitive interest rates and much more flexible repayment periods. If you have a higher credit score, this type of loan is the most financially sound option.
FHA Loans
There are
two types of FHA loans that you can take out.
A loan that requires a 3.5% down payment and a loan that requires a 10% down payment. These loans are insured by the Federal Housing Administration. Because they are insured, they are less risky for mortgage lenders than a conventional loan, so they have a lower minimum FICO score.
The minimum credit score that you would need to qualify for a 3.5% loan is 580. With loans that require a 10% downpayment, there is no official score number, but since FHA loans come from private lenders, each lender will have their own minimum score. These scores range everywhere in the 500’s. For example, the quicker loan has a minimum score of
580.
You only need to turn in one of your credit scores for this loan. If you turn in all three, lenders will use the middle score, and if you apply for the loan with your spouse, the lenders will use the lower of the two in their consideration.
VA Loan
The third type of loan is called a
VA Loan. This loan is insured by the US Department of Veterans Affairs (federal government), and the minimum credit score you need is 580. This type of loan is for people who are eligible members or veterans of the US Military, Reserves, or National Guard. Spouses of active military members or surviving spouses of those who died on active duty can also apply for this loan.
VA loans are nice because they don’t require any sort of down payment, and you aren’t charged for private mortgage insurance. The caveat is that VA loans charge a one-time fee. The cost of the fee varies based on the loan agency, down payment amount, and type of military service.
USDA Loan
Another type of loan that you can apply for is a USDA loan. There is no set minimum score. Instead, lenders’ requirements vary. But, as a rule of thumb, borrowers with
scores of 640 or above are qualified.
Tips on Increasing Your Score
Unfortunately, there is no quick and easy fix to boost a bad credit score. Qualifying for a mortgage takes at least a decent credit score minimums, and cores take time to build up, especially if they’ve taken a couple of hits. But there are things that you can do to make sure that your score is accurate and climbing.
The first thing that you can do is make sure that you have an accurate credit report. Each of the three credit bureaus releases an official annual credit report. You can order a copy at
AnnualCreditReport.com.
Once you get your reports, you can check the content for errors. If you find one, then you can contact that bureau and have it fixed. Once it is fixed, your credit score could immediately improve to the level that it should be at.
Consider asking a family member to add you as an authorized user on an existing credit account. When you are an authorized user, their purchases will gradually fix your credit score. But don’t add up debt payments on the account. You’ll hurt both the family member’s score and your relationship with them.
Everyday things that you can do to improve your score are paying your bills on time and paying down your credit card debt. Doing these two things are the surest things that you can do to make your credit score better. But, don’t immediately cancel your card, as doing so could cause your score to fall again.
Doing these things consistently are good credit utilization practices, and though you may not see improvement right away, these methods will help you so eventually, you’ll have the right mortgage and the right credit score to be able to buy the house that you’ve always wanted.
