Everyone knows that when buying a home, your credit score comes into play. What many people don’t know is just how good is good enough to buy a home, how it can impact your chances of buying a home, and what to do if you have bad credit and need some help repairing it. Credit can be mystifying at best, but with some common sense factors and a little knowledge, you can control your credit and keep yourself on the “plus” side so that you can buy a home easier and with more favorable terms.
What is a good credit score?
Credit score requirements change quite often as lenders adjust their rules and regulations to safeguard themselves. Immediately following the recent housing crisis, credit score requirements were raised, making it difficult for many buyers to get a loan, even if they had “decent” credit.
These days, 740 or higher is considered excellent credit. FHA and VA loans want a minimum of 620 and conventional loans, depending on down payment, look for a minimum of 640.
Please note: these credit scores can change at any time and are not considered fixed numbers. Please check with your local lender to see what loan programs they have and what their credit score requirements are.
How does my credit score affect my home buying?
The credit score (FICO) is a mathematical computation of all your credit history represented by a single number. This single number represents your credit worthiness – basically put, whether or not a bank can trust you to repay them their money in a timely fashion. If you have a low credit score, you are considered a higher risk for non-payment (whether it be default or late payment). The higher the risk, the less likely a bank is to lend you the money.
As with anything in life, the more trustworthy the lender feels you are, the more likely they are to lend to you…and the better terms you might receive on that loan. Of course, credit isn’t the only factor lenders take into consideration when making their decisions, but it is a big part. You can have excellent credit, but no cash on hand and be turned down for a loan. Your credit is the first item that helps a lender determine if they should dig further and take a look at your income, debts, and additional factors that will in the end determine your loan and the terms you receive for that loan.
How do I repair my credit?
The number one piece of advice for improving your credit score is to pay your bills and pay them on time – every time. Late payments are one of the worst things to do to yourself if you’re trying to improve or repair your credit score.
There are a few things you can do to repair your credit, the first is to know what’s in your credit report. You can access your credit report, for free, once a year at Annual Credit Report. We suggest you pull one every year in order to keep an eye out for any mistakes or fraudulent activity (identity theft). Take a look and make sure all the information is accurate. See anything that seems fishy? Contact the credit bureau and talk to them about the item. It may be something you forgot about or it might be something that you can dispute.
Sit down with a lender and discuss your plans to purchase a home. Often, if your credit score is borderline, they can offer specific steps to improve your score enough to get you above the minimum threshold for the loan. Occasionally, their advice might surprise you, so be sure you talk to someone who knows the ins and outs of credit first. We’ve seen instances where it was better to pay off a $15 charge than payoff a $5,000 charge, which may seem counter-intuitive when trying to improve your score.
If your credit score is really low, you may want to consider a credit repair company. There are many out there and some have not-so-great reputations. Be very careful and make sure you read all the fine print in order to be sure you know what you’re getting into. If you do go the credit repair route, be sure to remain diligent and follow all instructions, so that the process goes as smoothly as possible.
Special thanks to Luis Sandoval Jr. for asking the questions that led to this post.
image courtesy of The Consumerist