Your credit score plays a significant role in whether you get a home loan or not, and if so, under what terms. Here’s why your credit score is so important and what you can do to improve yours if it’s lower than you want.
What Determines Your Credit Score?
According to a credit repair Austin expert, most people think they have one credit score, but they have several, and they vary from each other. Three major credit reporting bureaus calculate credit scores (Equifax, TransUnion, and Experian), and each has different calculating methods, which causes the difference in scores.
However, in general, credit reporting agencies have the same criteria by which they calculate your credit score, which are:
- Your payment history (35% of your total score)
- How much you owe (30% of your score)
- Credit history (15% of your score)
- New credit (10% of your score)
- Credit mix (10% of your score)
What Score Do You Need For a Mortgage?
A house is probably the most significant purchase you’ll ever make, which is why you must get the best deal you can. When you apply for a home loan, the bank scrutinizes your credit score and credit history along with other details of your finances.
The good news is that there are loans available for a variety of people with varying credit scores, but the better the score, the better the interest rate and the more favorable terms you get.
There are several different kinds of loans for which one can apply, and each has different criteria with what is an acceptable credit score.
Here are a few of the many loans available and their respective scores required to land one.
FHA: This loan is designed for low to moderate-income buyers, and most people can get this loan with a score of 580 or above.
VA: The VA loan is for veterans, and scores range from 580 to 620.
Conventional: For buyers getting a traditional mortgage, scores range from 620-640.
Note that the above scores aren’t hard and fast rules because lenders are different in their requirements. However, 580-620 seems to be the minimum in most situations.
How To Build Your Score
If you’re one of the millions of Americans with a credit score in the lower range and want to build it up to secure a better loan, here are a few steps to take.
The most important thing to do to send your score in the right direction is to make all of your payments on time. One missed or late payment can knock as much as 100 points off of your credit score, so set up autopay if you have to so you never miss a payment again.
The next thing to do is to pay off debts as quickly as possible. If you have a high-interest rate card and owe a large amount, it can take years to pay it off if you make the minimum payments.
Sacrifice going to the coffee shop every day and start brown-bagging your lunch and put all of your extra money towards paying off those credit cards.
A higher credit score helps get you a better interest rate and better terms on your mortgage, which is why you must have the best score possible when you apply for your loan.