Your credit score is a critical factor in determining whether or not you can qualify for a mortgage loan to buy a home. Lenders use your credit score to see how you have handled credit in the past. Have you made payments on time? Do you keep your debt to a reasonable amount? Have you failed to repay a debt? Your credit score provides a history of your credit usage to lenders so that they can determine how likely you are to make your mortgage payments on time and repay the loan in full.
The experts here at Sequoia Real Estate will break this down to help you understand how your credit score is calculated, what kind of score you need to buy a home, and how you can improve your credit score.
What is a Credit Score, Exactly?
Your credit score is a calculation of your creditworthiness, based on your credit usage.
The most common credit score calculation method, FICO, is made up of five factors:
Payment History (35% of your score): Do you make your debt payments on time? On-time payments improve your score while late payments hurt your score.
Amounts Owed (30%): How much debt do you carry? The lower, the better. Try to keep your balances below 30% of your credit limits on each credit card.
Length of Credit History (15%): How long have you been using credit? When you open a new line of credit (like a credit card), the date is recorded in your credit report. The longer the account is active, the better. This is why you never want to close a credit card account, even if you don’t use the card.
New Credit (10%): Have you recently taken on new debt? This can temporarily lower your credit score while your payment history on this new debt gets established.
Credit Mix (10%): What kind of debt do you have? Student loan debt, for example, is weighted differently than credit card debt.
A FICO score of 800 or more is considered excellent. These are the most creditworthy candidates for lenders. 740-799 is very good. 670-739 is good. 580-669 is fair. And anything below 580 is considered poor.
How Does My Credit Score Affect the Homebuying Process?
The most important impact your credit score has on your homebuying is determining whether or not you qualify for a home loan. For a conventional home loan, most lenders require a credit score of at least 620. Some lenders will offer an FHA home loan to buyers with credit scores as low as 580. You might even be able to qualify for an FHA loan with a score as low as 500 if you’re able to make a bigger down payment.
More than just qualifying for a loan, your credit score is a factor in determining the interest rate on your home loan. A higher credit score gets you a lower interest rate. And a lower interest rate means a lower monthly mortgage payment and less money spent on interest over the term of your loan. A lower interest rate can save you hundreds of dollars every month!
How Can I Improve My Credit Score?
If you’re not happy with your credit score, there are a few things you can do to improve your score.
If you have any accounts in default, contact those creditors to see if you can make a deal. They might be willing to remove the default from your credit report if you pay the balance (or even a negotiation portion of the balance).
Contact creditors where you have a current past-due balance and ask them if they can remove the mark on your credit if you make the payment right away.
Pay down large credit card balances to get your balances below 30% of each card’s credit limit.
Continue making all payments on time.
Sequoia is Here to Help!
The real estate experts here at Sequoia Real Estate never tire of making homeownership accessible to Californians in the Bay Area. We can connect you with reputable lenders who can help you decide on the right home loan type for you. Contact us today to speak with a licensed real estate professional about your homebuying goals!