What You Need to Know About Your Credit as a Homebuyer
What Determines Your Credit Score
How Your Credit Score Impacts Your Home Search
One of the most important aspects of your home search doesn’t actually involve looking at houses! We’re of course talking about your credit score, and all the different ways that it impacts your home search. In today’s blog, we’ll cover the ways that your credit score is calculated, how it impacts the type of homes you can realistically afford, and how it affects your mortgage payments.
What Determines Your Credit Score
Your credit score is calculated by considering several different factors, with the following three factors being the biggest determinants of your credit score.
- Payment History: The most important determinant of your credit score is your payment history, and the consistency of your payments. By showing that you can take out loans and make the payments consistently, and on time, you will increase your credit score.
- Credit Length History: In addition to your payment history, the actual length of time that you have credit is another determinant of your credit score. If you can show potential lenders that you can successfully hold credit for a period of time, it can positively affect your credit score.
- Your Credit vs. the Amount of Debt You Have: The difference between the amount of credit you have versus the amount of credit you currently have impacts your credit score. Having a small amount o credit and an even smaller amount of debt will favorably impact your credit score.
How Your Credit Score Impacts the Homes You Can Afford
Now that we’ve discussed the most important factors that determine your credit score, it’s time to look at how exactly your credit score will impact the type of homes you are able to afford. First, your credit score will play a large part in determining which mortgage loan is the best option for you. Typically speaking, the below numbers are the standard minimum credit scores to apply for each of the loans below, according to Experian.
- Conventional: For a conventional loan, the recommended minimum credit score is 620. Conventional loans are the most common loan type that you will find on the market, and are not insured by any government agency. These loans do conform to the standards set by Fannie Mae and Freddie Mac, which are government-sponsored entities.
- FHA: To qualify for an FHA loan, you should shoot for having a credit score of at least 500 if you are able to put 10% down, and 580 if you put down 3.5%. FHA loans are insured by the Federal Housing Administration, and are a great option for those who are still building their credit, or don’t have a good down payment saved up.
- VA Loans: While there is not a set recommended minimum credit score for VA loans, typically speaking you will want a score of 620 or higher. VA loans are loans that are offered for members of the military, their spouses, or other eligible beneficiaries, like children of military members.
- USDA: Similar to VA loans, there is not a set minimum amount, but lenders will typically recommend a minimum of 580. A USDA loan is available for those looking to purchase a home in a rural area, and for those with a low to moderate income. These loans are insured by the U.S. Department of Agriculture.
In addition to impacting the type of loan you could qualify for, your credit score also impacts the mortgage rate that you will be able to get within that home loan. The higher your credit score, the more favorable your interest rate will be, which can save you money every single month for the life of your loan. If your credit score is lower, not only will you be qualifying for fewer mortgage loans, but your interest rate could be higher to compensate for the potential risk of lending. It is also important to consider how the type of loan can affect your chances of getting your offer selected if you are in a multiple-offer situation. Typically speaking, sellers prefer to accept a conventional loan over other loan types, like FHA or VA. If you are utilizing an FHA loan and competing against other conventional loans, you could potentially miss out on the home you want because your loan type is seen as less attractive to the home seller.
Contact the Ask Cathy Marketing Group to Help Your Home Search!
If you are wanting to learn more about ways that you can improve your credit score, or want to talk to a member of our team about buying a home, contact us today! Our team of experienced Realtors Ⓡ have decades of experience buying and selling homes, and winning for our clients, no matter the market. Contact us today for your complimentary consultation by calling us at (816) 268-4033, or by filling out the contact form below!