Though your credit score, better known as your FICO score, is essential when securing a home loan, it is only one of several factors involved. Your income, debts, employment status, and the continued expectation of employment, how much you’re looking to borrow, and how much you intend to put down on your house will all be factors that lenders take into consideration.
Some mortgage companies will tell you your credit score is the most important factor for loan approval, but that is not always the case. You can find mortgage lenders that put more weight on the overall qualifications of the buyer. It’s important to shop around for a lending company.
Maybe you’re a first-time home buyer or someone who has never applied for a loan of any sort before; in that case, all this talk of credit scores could feel disconnected. Let’s connect the dots here and help you understand your credit score and how it is calculated.
Credit scores are calculated by the big three U.S. credit bureaus: Experian, Equifax, and TransUnion. With all three of these, your credit score should be relatively similar; however, each one does pull from slightly different sources. Experian will look at rental payments, while TransUnion looks at employment history.
These reports are exceptionally detailed, and that’s by design. If you paid your car loan bill late three years ago, Experian would be able to pinpoint the exact month when that payment was late. The details matter, and that’s why it isn’t easy to keep a perfect credit score.
Here are the main variables that these three credit bureaus use to calculate your score;
This is to determine if you’ve made debt payments on time regularly. If you’ve never missed a payment or been late, then you’re good. However, if you’ve been late, even once, a 30-day delinquency can cause as much as a 90 to 110 point drop in your score.
This is how much debt is accumulated on credit card accounts, divided by the credit limit on the sum of those accounts. In this case, ratios above 30% will harm you. If you have a total credit limit of $5,000, you’ll want to have debt less than $1,500 when you’re applying for a home loan.
It will help you apply for a home loan if you have a long track record of being a responsible credit user. A longer payment history will boost your score. There are alternative credit scoring methods if you don’t have a long enough credit history to establish good credit and build a good score. VantageScore is a company that can reportedly establish a credit score in as little as one month. This is quick compared to FICO, which requires at least six months of credit history.
Your credit score goes up if you have a copious number of different types of credit card accounts. This means you would have credit cards, retail store credit cards, installment loans, and a previous or current home loan.
Studies have shown that opening several new credit card accounts within a short period can be a red flag for credit scores. They represent a greater risk to loan companies. If you’re looking to apply for a home loan, do not apply for new credit cards during your search period before you secure a loan.
Remember, each time you open a new credit line, the average length of your credit history will decrease, which will hurt your credit score.
Now that you understand what counts as good credit, you may want to check your scores. You can get your credit score online at CreditKarma.com. This is a free service where you can check your score, set up monitoring, and find ways to improve your credit score. You can also check with your credit card company; some offer a free credit score and credit reports so you can do your won credit check.
Another way to see what’s on your credit report and identify problems that might en dragging your credit score down is to get a free copy of your report at AnnualCreditReport.com. Experian, Equifax, and TransUnion, the three major credit bureaus, will also supply you with credit reports and scores; however, these will come with a fee. You should be aware that a report or score from any of the big three may not be as comprehensive as a report or score from FICO. The reason being FICO compiles data from all three credit bureaus to give you a more detailed report and a more accurate score.
According to a Federal Trade Commission survey, even if you are secure in knowing that you’ve never missed or made a late payment, one in four Americans find errors in their credit scores. Errors are not uncommon. Although you may have never missed or been late with a payment, someone with your same name did, and the bank recorded the error on your account by mistake.
If you find such an error on your credit report, do not panic; you can remove it. Contact Equifax, Experian, or TransUnion with proof that the information is incorrect; they will remove the flaws from your report if they accept your proof. The flaw removal will then be reflected in your FICO score.
Even if there are no errors in your credit report and your score is just not satisfactory, you can improve your credit score. There are multiple credit-scoring models you can use, but always remember you will not be able to raise your credit score overnight. So, check your credit score at least annually, especially if you’re thinking of buying a home soon.
Typical home loans, including conventional, FHA 203K, and VA loans, require a credit score of 620 or above. USDA loans require a minimum score of 640 for approval. What are FHA and VA loans? Let’s break those down simply for you.
VA loans are home loans with lenient qualifying guidelines and favorable terms for active military service members, veterans, and eligible military spouses. Because VA loans are backed in part by the federal government, lenders and banks can offer reduced interest rates.
An FHA 203(k) loan is a type of government-insured mortgage that allows the borrower to take out one loan for two purposes: home purchase and home renovation. An FHA 203(k) loan is wrapped around rehabilitation or repairs to a home that will become the mortgagor’s primary residence.
Looking at these numbers, you may be wondering, does that mean I cannot get approval for a loan if my score is 619? That is likely the case, But do not despair, many conventional loan programs have a little more leeway, and they tend to look at loans on a case-by-case basis. These are the places that look at the overall qualifications, and they do not put everything on your credit score.
Also, you should know that even if your credit score is lower than 620, there are FHA loan programs for potential borrowers who have scores of 580 and above.
Technically, an FHA loan doesn’t have a minimum score, so a strong borrower with other good qualifications could score as low as 500 and still get approved for a loan. But, this is a particular situation, and you would have to be very well qualified otherwise.
How low does your credit score have to be before you have absolutely no hope of securing a home loan in Utah? Good question and the answer is, it depends. Kind of unhelpful, right? But that is the best and most accurate answer.
You have to understand that no two borrowers are the same. And no two lending companies are the same either. And this fact can change daily; you never know. If you have a good meeting with a lender but a low credit score, they may still agree to look over your file and think about it before they make a decision. In these cases, if you have a secure job with solid income, little debt, and are planning on putting down a sizeable down payment, you may still get approved for a loan.
The best way to be ready for applying for a loan is to work with a home loan expert and get all your paperwork in order so you can target the type of loan you’re most qualified for.
If you find yourself being overwhelmed by the talk of credit scores and loan payments, maybe it’s time you talked to professionals who have spent decades helping people build and buy a new home.
Revere Homes has been building outstanding homes in Utah for decades, and they know what it takes to secure payment, and they work hard with preferred lenders to get you into that new home.
Talk to Revere Homes and contact their preferred lenders; these are lenders with experience who will work to find you the best mortgage and loan options. Contact Revere Homes and get the most affordable loan for your specific needs.
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