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Why Your Credit Score Matters when Buying a Home
What is a good credit score for buying a house?
A FICO score of 800 or higher is considered exceptional; 740 to 799 is very good; 670 to 739 is good; 580 to 669 is fair; and 579 or lower is poor. Although it’s up to specific lenders to determine what score borrowers must have to be offered the lowest interest rates, sometimes even the difference of a few points on your credit score can affect your monthly payments substantially.
Can I get a mortgage with a low credit score?
It is possible to get a mortgage with a low credit score, but you’ll pay higher interest rates and higher monthly payments. Lenders may be more stringent about other aspects of your finances, such as how much debt you have, if your credit is tarnished.
Keep in mind that credit requirements vary from lender to lender. Do yourself a favor and shop around with multiple lenders to find one that will work with you. Here’s a quick rundown of typical minimum credit scores for different loan types:
Conventional loans: Many lenders will accept a credit score as low as 620 for conventional loans, but they may have other requirements for those borrowers, such as higher income.
FHA loans: The Federal Housing Administration guarantees loans for borrowers with tainted credit and low down payments. You can qualify for an FHA loan with a credit score of 500 to 579 with a 10 percent down payment. Borrowers with a score of 580 or higher must put down at least 3.5 percent.
VA loans: Backed by the U.S. Department of Veterans Affairs, VA loans are offered to active and veteran military personnel and their families. The government doesn’t have a minimum credit score requirement to qualify for VA loans, though many lenders require a minimum score of 620.
Tips to boost your credit score
If your credit score isn’t great, there are still options. Instead of settling for the mortgage rates you’re currently qualified for, consider postponing homeownership and working to revive your score and improve your options. Here are some quick tips to help:
- Check your credit report and correct any errors. Before applying for a mortgage, request a copy of your credit reports from the three major credit reporting agencies: Experian, Equifax and TransUnion. You’re entitled to a free credit report from each of the agencies once a year. If you find inaccurate or missing information, file a dispute with the credit reporting agency and the creditor. Clearly identify each item you’re disputing and be sure to include supporting documents.
- Pay down credit card balances to below 30 percent of your credit limit. Your credit utilization ratio is the amount of debt you have compared with your available credit. To calculate this, divide the amount of debt into the amount of available credit. If you have $10,000 in debt and $20,000 in available credit, your credit utilization ratio is 50 percent. Lenders like to see credit utilization of 35 percent or less.
- Pay all bills timely. Your payment history accounts for 35 percent of your credit score. While late payments stay on your credit report for seven years, their impact on your score diminishes over time.
- Don’t close older credit lines after paying them off. Closing unused accounts sounds like a good idea, but it may raise your credit utilization ratio and your credit score can drop.
- Don’t open any new lines of credit or take out large loans. The less debt you have, the better off you are. FICO recommends not opening new credit accounts to increase your credit utilization ratio because each credit request can slightly lower your score. When your credit has improved, rate-shop within a 30-day window. Spreading out the rate inquiries can hurt your score.
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