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If you’re a first-time home buyer, you may worry that your credit score is too low to purchase a home.
While you’ll need a credit score of 620 or higher to buy a house with a conventional loan in 2023, many other types of mortgage loans are available and their requirements vary widely. Some allow for lower credit score minimums and some have no requirement at all. The first step is to learn what your current credit score is so you can begin searching for an appropriate mortgage vehicle or take steps to improve it, if necessary.
In this article, we will share some valuable information about credit scoring along with six helpful tips for boosting it.
What is a credit score?
Credit scores can be a confusing topic for even the most financially savvy consumers. A credit score is a numeric summary of your credit history, a commonly-used method for lenders to predict the likelihood that you will repay any loans they make to you. Credit scores range from 300 (poor) to 850 (excellent). Higher scores illustrate consistently good credit histories, including on-time payments, low credit use, and long credit history. Lower scores indicate borrowers may be risky investments because of late payments or overextended use of credit. There are no exact cutoffs for good scores or bad scores, but there are guidelines for each. In general, most lenders view scores above 720 as ideal and scores below 630 as concerning.
Get to know the factors that go into credit scoring.
It’s important to know your credit score and understand what affects it before you begin the mortgage process. Once you understand this information, you can begin to positively build your credit score or maintain it to give yourself the best chance of qualifying for a mortgage at a great interest rate.
One of the most common scores used by mortgage lenders is the FICO® Score (created by the Fair Isaac Corporation). FICO® Scores help lenders calculate the interest rates and fees you’ll pay to get your mortgage. While exact scoring models may vary by lender, some variation of the standard FICO® Score is often used as a base. FICO® takes different variables on credit reports from the three major credit bureaus (Equifax®, Experian™, and TransUnion®) to compile a unique score for each applicant, based on the:
- Payment history
- Amount owed
- Length of credit history
- Types of credit
- New credit
The higher the score, the easier it is to qualify for a lower interest rate on a great mortgage.
When it comes to mortgages, credit score requirements run the gamut.
The minimum credit score you need to qualify for a mortgage in 2023 depends on the type of home loan you’re trying to obtain. Scores differ whether you’re applying for a loan insured by the Federal Housing Administration, better known as an FHA loan; one insured by the U.S. Department of Veterans Affairs, known as a VA loan; a USDA loan insured by the U.S. Department of Agriculture; or a conventional mortgage loan from a private lender.
Begin by laying the groundwork.
To begin the mortgage approval process, get a copy of your credit report. Consumers can access a free annual credit report at AnnualCreditReport.com. If your score is lower than you’d like, examine the report in detail to identify what’s comprising it. This exercise can be tedious and time-consuming, but there are many free and low-cost public resources available that can assist you, such as American Consumer Credit Counseling and the National Foundation for Credit Counseling.
If your credit score needs a boost, follow these six best practices:
- Pay bills on time: Payment history accounts for 35% of your FICO credit score.
- Lower credit utilization: Temporarily increase your debt payments or request a credit limit increase.
- Avoid new credit lines: Credit inquiries are performed for every new line of credit requested and can negatively affect your credit score for six months afterwards.
- Don’t close old accounts: Keep existing credit lines open even if you rarely use them, making sure payments are consistently on-time and up-to-date.
- Get credit for rent and utility payments: Rent reporting services can add on-time rent payments to your credit reports. Rent payments are not considered by every scoring model, but a long record of consistent payments can only help.
- Be patient: It can take up to six months to make significant changes in your credit score, but if you put the effort in now, you’ll reap the benefits down the road.
Credit scores don’t recover overnight but even small improvements can reduce the interest rate you may be eligible for, which can save you tens of thousands of dollars over the life of your mortgage.
Pre-approval can put you in the driver’s seat.
A mortgage pre-approval enables you to see how much a lender is willing to extend you when you’re ready to start house hunting, how much you could pay per month, and what the interest rate will be. When you apply to get pre-approved, lenders will review your credit history and consider your current credit outlook. This includes examining factors such as:
- Have you been on time with your payments and obligations?
- What does your current debt load look like and how is it spread out?
- How much experience do you have managing credit?
- Do you let items go into collections?
- Have you previously filed for bankruptcy?
Lenders ask these questions to get comfortable with your ability to manage your finances and to assess your credit risk.
Once you have been pre-approved for a mortgage, you’ll get a letter that you can take to sellers. This document shows that you have already started working with a lender. It gives sellers peace of mind to know they won’t be wasting their time with someone who couldn’t afford their home. As a buyer, pre-approval also lets you know how much mortgage you can afford, establishes your creditability, and puts you on the fast track to closing.
Saving even a small amount on your monthly mortgage payment can make a big difference in your nest egg. The helpful professionals at Certified Title can provide the valuable tools and information you need for all types of residential and commercial real estate transactions. To learn more, please contact our experienced team today.
About Certified Title Corporation: Since 1994, attorney-owned Certified Title Corporation has been furnishing residential and commercial real estate stakeholders across the nation with robust title insurance, settlement, and escrow services. Renowned for their industry-leading reliability and exemplary level of service and quality, the Maryland-based company helps clients from all walks of life achieve their asset goals. To learn more, call (888)486-5511 or visit https://www.certifiedtitlecorp.com/.