Understanding Your Credit Scores When Buying a House
Checking your credit score in advance of buying a house is essential.
Have you checked your credit score recently? If not, you should. When it comes time to buy a house, you will be looking for a mortgage if you are like most people.
Getting a loan with an interest rate you can be happy with requires a good credit score, which is why it is so important to get your credit score before buying.
You want to know where your score is to anticipate if you can purchase a house and what kind of terms you’ll receive. Even if your score isn’t great, there are ways to improve it. So, either way, check your credit score before buying a house!
Checking your credit score’s accuracy should be one of the things to do before buying a house, among many others.
It is also possible there could be mistakes on your credit report that cause your score to drop. Given the potential for errors, knowing your credit score before applying for a mortgage is vital.
Credit scores play a significant role in getting the best mortgage interest rates. When discussing something as substantial as a home mortgage, striving for the best terms and conditions possible makes sense.
Preparing starts with getting your score correct if there is an error or improving it to get the best deal possible.
While looking at homes is undoubtedly exciting, preparing to get a mortgage is essential before ever stepping foot on a property.
Preparation can be even more critical for those who have never purchased a home. One of the smartest things a first-time home buyer can do is work hard at boosting their credit score before a purchase.
Your Credit Score Impacts Your Mortgage
Credit scores are a part of the lending process that everyone has to deal with. Lenders need an excellent idea of how likely you are to pay back a loan before giving it to you, and your credit score is a big part of what they use.
The three major credit reporting agencies – Experian, Equifax, and TransUnion – each keep a report of your credit history and use that history to calculate a score for you.
The higher your score, the better you look to lenders, and in most cases, the better the terms of the loans you can get. At the same time, getting a mortgage requires a minimum credit score. Striving for the best scores earns better rates.
Based on different mortgage programs, you can see what credit score is needed to buy a house.
Each agency uses a different formula for calculating your score, so you can expect three slightly different scores. Each organization will measure various aspects of your credit, like how much debt you currently have, how long you have had credit, how much of your credit is now being utilized, and other information.
Using all these different factors, they give you a score that tells lenders how good a risk you are to lend to. When your credit scores aren’t excellent, you’ll need a bad credit home loan, leading to less desirable mortgage terms.
The max credit score is 850, but having a score so high is relatively rare. Only about ten percent of borrowers have a score above 800, so having one lower than that is perfectly fine.
A score in the 700s is still quite good, and it is possible to get favorable loans with a score as low as around 680.
The Effect Of Your Credit Score On Your Loan
Your credit score will play a significant factor in the loan you can get or if you can get a loan at all. Every lender has cut-off points where they will refuse to lend.
If you score less than 580, most lenders will turn you down outright.
You might be able to get a mortgage with an FHA loan for scores under 580. However, you will need to have at least ten percent down.
Usually, as long as you score above 700, you should not have to worry about getting turned down.
Loans can vary considerably in the interest rates charged and the fees the lender can tack on. You can expect low-interest rates and fewer fees when you show up to a bank with a great credit score.
The lower your score, the more likely lenders will charge you a higher interest rate and the more likely they are to add expensive fees that can add up quickly.
This translates into not getting the best loan terms, which means you pay much more in the long run.
It makes sense to consult with a mortgage professional on the programs for first-time buyers.
A credit score of 700 or above will usually be enough to get you the loans you want and terms you can be happy about.
Once you get below 680, you should be prepared to shop around because some mortgage lenders may turn you down – or offer you a loan you don’t want to accept.
You Can Raise Your Credit Score Before Buying a House
One of the biggest reasons you want to check your credit score before buying is to understand where your credit is clearly.
You can raise your score by taking the right actions. Many people with terrible credit have managed to repair their scores and eventually get a mortgage, so you have options. Discovering you have a low rating can be upsetting, but fortunately, you can boost it back up if you try.
You can do several things to improve your credit score, including paying down debt, paying off collection accounts, and avoiding taking out any new debt while trying to get a mortgage. Taking on new debt while trying to buy a home is, in fact, one of the biggest mortgage mistakes you can make!
Credit agencies will give you a higher score if you can lower the percentage of credit card debt you have to 30% or below the maximum for each card, a goal you should have if you want the best score.
Often if you call collections companies, you can pay off your debt to them at pennies on the dollar if you try negotiating with them.
The point of avoiding any new debt is an important one to remember. You want to do everything you can to look better on your credit report – not worse. Opening up another credit card and running it up, or buying a car using a loan, may knock your score to the point where you are out of reach of the loans you want.
If you are not disciplined with your credit decisions, I recommend a credit improvement company like Credit Karma.
Credit Karma provides you with sound advice to make the right credit choices. Quite often, folks make bad decisions that could have easily been avoided. One of the best things about Credit Karama is it’s free to use.
Check Your Score For Free Before The House Purchase
The three major credit reporting agencies must give you one credit report a year for free. As long as you haven’t requested a free report in the past year, you can download your three free reports online.
You can go to the Annual credit report to get all three. If you have received your account information within the last year, it is still worth purchasing a new, current report to ensure all the data is accurate and get an up-to-date look at your score.
You want to see the same things the lenders will see when checking your information.
If you find any incorrect information on the report, request a correction in writing from the reporting agency.
If you plan on buying a home soon, check your credit score for free and take the time to fix it the best you can. Doing so could save you tens of thousands of dollars over the life of your loan.
Fixing Credit Report Errors Before Buying a House is Essential
Is there a strong possibility there are errors on a credit report? There sure is! Let me repeat this – make sure you check your credit score before buying a home!
It is not uncommon at all to find mistakes on a credit report. Inaccurate credit reporting affects millions of Americans.
A 2019 Federal Trade Commission study discovered that many consumers have errors on their credit reports. Shockingly for one out of every twenty customers, the report said, those errors could mean paying higher interest rates for car loans or insurance.
When you find this is the case, it is essential to understand how to correct credit reporting errors. Use this excellent article as a guide for fixing your credit report mistakes immediately.
Follow the steps outlined, and you will be on your way to resolving this financial issue. In the long run, it will be well worth it.
Final Thoughts on Checking Your Credit Score
The process of getting a mortgage and ultimately buying a home can be both exciting and stressful at the same time. Getting a mortgage today is much different than it used to be in years past.
Banks and other mortgage lenders are much more stringent than ever. Buyers are required to submit gobs of paperwork that can sometimes seem to be significant overkill. They go over the finances of every borrower with a fine-tooth comb.
If you play by their rules, you will come out perfectly unscathed in the long run. Remember, during the life of a mortgage, the fees and the interest rate you pay can take a significant amount of money out of your pocket.
It is well worth it to keep these expenses to a minimum. For example, many home buyers put less than 20% down. In these cases, lenders will ask you to pay what is known as private mortgage insurance.
This insurance is a fee that does nothing for you as a homeowner. It’s pure protection for the bank if you default on your loan. Therefore you will want to know how to eliminate private mortgage insurance as soon as possible. This kind of knowledge can help you keep more of your hard-earned money in your pocket!
Some will want to avoid PMI upfront altogether.
Do yourself a favor and check your credit score before buying a house. Please ensure there are no errors in your report that could be causing your score to drop when it shouldn’t. Hopefully, this credit score information has been helpful.
Additional Helpful Mortgage-Related Articles
- How does a reverse mortgage work – are you considering getting one? See what you need to know about reverse mortgages in this insightful article.
Use these additional mortgage resources to make the home-buying process go far smoother. Always remember the importance of your credit score when purchasing a home!
About the Author: The above Real Estate information on the check your credit score before buying a house was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of Metrowest towns for the last 37+ Years.
Are you thinking of selling your home? I am passionate about Real Estate and love sharing my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.
