Not everyone can afford to buy a house paying cash upfront which is why people need to know their credit score. The reason why that’s important is that credit score makes you qualify (or not) for a loan and it shapes the interest rate you’ll end up paying.
The Process of Buying a House
If you are in the market, looking for your next home you must be well acquainted with the requirements by now, such as lenders looking at your income, savings, and debts when deciding if they should grant you a loan or not. However, what has the biggest detrimental power here is your credit score. At the end being approved or declined comes down to whether you have a high or low score. Experts advise that you start checking your score in advance in order to get a better understanding of your financial state at all times, and you are better prepared when the time of buying comes.
Understanding House Mortgages
Before going into detail about buying a house and lending the money for it, you need to have a gauche of just what a mortgage is. Namely, a mortgage is a loan that can only be used to finance the buying of a house and nothing else.
Mortgages come in multiple parts and last anywhere from 15 to 30 years because they are a very large in sum. The parts a mortgage includes are collateral, a down payment, taxes, and insurance. Keeping all these in mind, you need to make preparations and decide well if you are prepared for what’s going to take for you to get the home you want.
The Minimum Amount of Credit Score You Need
Now that you have a better understanding of what kind of loan a mortgage is, let’s talk some credit score talk. Thing is, credit scores aren’t something fixed but rather something that changes according to the economy and individually for each lender. For instance, in times of recession and bad economy going downhill, it’s predictable for lenders to set high limitations and reject people who have scores of 720 or even above. Luckily, the economy has improved a great deal since 2008 thus these limitations aren’t as strict as they used to be.
Now the categories and ranges of credit scores go something like this:
- Credit score of 750 and above is considered Excellent
- Credit score of 700 – 749 is considered Good
- Credit score of 650 – 699 is considered Fair
- Credit score of 550 – 649 is considered Poor
- Credit score of 550 and below is considered Bad
If you are applying for an FHA loan, the lowest credit score you can afford to have is 580, while the Fannie Mae or Freddie Mac loans both require a minimum of 620. While this is in general, you should have in mind that individual lenders might raise their limit higher and check your income and what’s the amount of your down payment you are paying upfront.
Scoring Models and Credit Scores
There are many scoring models in the industry and they all shape your credit scores differently. The most commonly used one is the FICO score, developed by Fair Isaac, used by 85% of the lenders when they need to determine whether they should approve or reject your loan application. Another scoring model that is gaining popularity lately is the VantageScore developed by Experian, Equifax, and the TransUnion. This scoring model takes into consideration your payment history, the amount you owe and how old your accounts are.
Even though FICO and VantageScore have ranges between 300 and 850, they use different algorithms that will give you different scores that might even be in large variations.
Putting your credit scores aside, employment and income are of vital significance to the lenders as well. After all, they determine if you are going to make payments on time or not, each coming month. The area where your dream house is, is something lenders look at as well. This is because oftentimes external factors affect your risk of paying. The decision of becoming a homeowner should be something you consider well and beforehand because as you can see, there are many requirements and processes to be completed in the long run.
Buying a House with a Bad Credit
It’s true, bad credit scores can at times make you put a large down payment or make you rejected for a loan completely, but having one should not stop you from starting your process altogether. It might only be a matter of time, a little bit of work and a bit more money.
Namely, even people who recently underwent a bankruptcy or foreclosure do have a shot at getting approved for a house loan without skyrocketing rates and large down payments. These mitigating circumstances come thanks to mortgage programs created by the government in order to get the housing market back on track.
House Buying Tips to Get Better Credit Scores
Here we offer certain options that are supposed to help you overcome a low credit score and the challenges it brings with it.
- Organization is the key: Planning ahead for your loan application is very important. This means that you should start collecting tax returns for the last year, W2s, pay stubs, statements for investment or retirement accounts, bank statements, and a list of your debts with the amount owed and your monthly payment. This is because the lender will want to see all this, especially when you have a low credit scoring.
- Having a co-signer: If you have someone who has a good credit score as your co-signer will significantly improve your situation. The reason for this is that the co-signer agrees to take responsibility if you fail to make regular payments.
- FHA loans: The reason why we are suggesting that you try for an FHA loan first is that it is insured by the federal government and doesn’t have as high credit requirements as the rest of them. Additionally, FHA loans do not require 20% as down payment but only 3.5% down.
As always, we recommend that you speak with a lender directly about your circumstances and to see what you can qualify for. If you would like the name of some reputable lenders here in the San Fernando Valley and Los Angeles areas who are always happy to help, please feel free to reach out! No obligation required.
Did your credit score affect your ability to get the home loan you wanted? Share your experience in the comments!
If you’d like more information on the San Fernando Valley or Los Angeles, or to have help looking for your next home, please feel free to reach out! I’m happy to help, no obligation.