Julie Gross' Blog
Before you even start looking for a home, you should know what your credit score is. You can pull your own credit score from the three major bureaus without having points deducted from your credit score. You should know your score since it will affect how high your mortgage payments will be, and it will also determine if a lender will lend to you. Certain types of loans have a minimum credit score — if your credit is below the minimum, you won’t be able to qualify for that type of loan.
Credit Score Minimums
Many programs require you to have a minimum credit score. Most lenders will require these scores for these types of loans:
620 for a conventional loan;
580 for an FHA loan if you want your down payment to be as low as 3.5 percent;
500 to 579 for an FHA loan with a down payment of 10 percent;
620 for a VA loan;
640 for a USDA loan; and
720 or higher for a jumbo loan.
Credit Scores and Interest Rates
The lower your interest rate is, the less you have to pay to the lender for allowing you to borrow money. This also means a lower monthly payment for you. Even a half-point could make a large difference in how much you have to repay. While a half-point might equal $50 or $60 per month on your loan, when you pay that over 360 months, that is $18,000 to $21,600 over the life of the loan.
Creditors use your credit score to see how careful you are with credit – how you will pay it back, and if you will pay it back. The higher the score, the less risk you are to the lender.
Increase Your Credit Score
Sometimes, you can’t help having a low score. You might have lost a job, or you might have had high medical expenses after an accident. Before you buy a house, you should get your score up as high as possible. While it seems like it will drop overnight, it definitely takes some time to increase your credit score. While you are working on your credit score, you can start putting some money aside for a larger down payment. To help increase your credit score:
Get a copy of your credit report and scores from all three major bureaus.
Go through your report. Make note of anything that is incorrect, including accounts you have and your personal information.
Dispute anything that is wrong with each of the credit bureaus. If you have an account that is not yours that is listed on TransUnion, dispute it on TransUnion. If it shows up on TransUnion and Equifax, dispute it on both.
Determine how much revolving credit you have. This is the amount you are allowed to spend on credit cards and some types of home equity loans. Divide the total of your balances by the total amount of credit you have. That number needs to be below 35 percent for a better interest rate. In some cases, a lender will not give you a mortgage if that number is too high.
Showing more credit with a lower debt to credit percentage increases your score. Don’t close out any accounts, but make sure they are all paid on time, and get the highest balances as low as possible. During the months before you buy a house, you should try to avoid using credit cards if possible.
Pay off as much debt as possible.
Remember, every time someone, other than you, pulls your credit, your score gets dinged. Don’t shop for a mortgage until you are ready to buy, and try to keep all inquiries within 30 days.
Keeping good credit is more than paying on time. You also have to responsibly manage your credit.