Thinking about buying a home? Congratulations! This is a big life moment, one that will require a lot of attention to detail, responsibility and research. And good for you for already beginning your research. But while you might feel ready to make the leap and invest, there still are factors that can hold back even the most qualified of potential homeowners. One of the most common of these hurdles is bad credit. Having a bad credit score can make mortgage lenders weary of offering you money and cause your interest rates to soar through the roof. But if you're just getting acclimated to the idea of buying a home and don't think your credit is where you want it to be, don't worry, there are things you can do to improve your score, whether you're looking to change from bad to good, or good to better. Here, everything you need to know about your credit score if you're looking to buy a house.
Credit Score Range:
You might already know this, but just to recap: A credit score is a three-digit number based on your credit history. It's determined by an algorithm that takes into account the number of open credit accounts you have (like your rent, credit cards and student loans), your purchase history, your payment history and any outstanding balances. It can range from 300 (the lowest possible score) to 850 (the highest possible score).
Don't know your credit score off the top of your head? There are many places to get a good estimate for free. If you have a credit card, your provider might print your score on your monthly statement or have it available via their online user portal or app.
However, if you want to know what your credit score actually is, you will need to know your numbers from the three major credit bureaus: TransUnion, Equifax and Experian. Each bureau is legally required to give consumers a free credit report once a year. Mortgage lenders will use something called a tri-merge credit report, a report that merges the scores across the bureaus, to determine your mortgage, says Richard Redmond, vice president and broker of record at ACM Investor Services, Inc., in Larkspur, California. Have the same information your lender has by requesting that your lender provide you with a copy of this report before you authorize the lender to obtain it.
Once you have your credit score, you'll want to figure out what those three numbers mean. According to Credit Sesame, credit scores are broken down like this:
Excellent: 750 & Higher
Bad: 550 & Under
As of October 2017, the average credit score in America was between 669 and 699, according to WalletHub. While having a credit score along the national average is good, it's always beneficial to have a higher credit score in the homebuying process, since your credit score is a large factor in determining whether or not you can get a mortgage, as well as how much you're approved for. If you have good credit, it's likely that you will be approved for a higher mortgage than someone with a low credit score.
Why does your credit score matter so much? It's because it's a universal way of measuring how risky it would be to lend you money. Mortgage lenders look at a good credit score and see that the applicant is low-risk, meaning that they can be confident that the applicant will pay back the loaned money in a timely manner. However, bad credit signals to your lender that there is a high risk that you would not be able to pay back your loan on time.
Your credit score can also tell you how much more you'll end up paying for your home, on top of the asking price. "The ramifications for lower credit is that you're going to pay more money," says Douglas Boneparth, president of Bona Fide Wealth, a financial advisor firm geared towards millennials. "The higher the score, the lower the penalties." Typically, lenders will give you a lower interest rate if you have a high credit score. If you have a low credit score, not only will you pay higher interest rates, but there's an additional chance you'll have to take on private mortgage insurance (PMI) at an additional cost, Boneparth says.
How To Get A Good Credit Score:
Just checked your score and find it's less than stellar? It's not necessarily hard to raise your credit score when you make a concerted effort. However, it's not something that you can fix overnight. "The first thing you're going to need is time," Boneparth says. That means months, and maybe even years of making on-time payments.
Aside from time, there might be some quicker fix options. Want to know what else you need to do to better your score? Review your credit report. "Informing yourself is a massive plus," says Boneparth. "How could you know what to work on if you don't know what's wrong?" There might be an outstanding charge you've never heard of or completely forgotten about. Just paying off any accounts in collections can help quickly raise your score.
See something that seems wrong on your credit report? Reach out to the reporting credit bureau as well as the company or organization the account is from. The credit bureau will then investigate the line item on your behalf. If it is a mistake, it will be deleted or corrected, and your credit score will improve.
A couple other reasons for a low credit score could be that you just graduated college or never rented an apartment or had a credit card before. This is not a bad position to be in, since you can raise your credit score quickly compared to those who have a bad score because of public records (bankruptcies or tax liens), bills in collections, and a high number of recent credit applications. Apply for a basic credit card from your bank. You'll likely be approved with a very low credit limit, but once you start using it for purchases (and paying it off on time), you'll see your score improve.
If you're not so lucky to be in that situation, your credit score will only rise once you take charge of your outstanding balances—that means tightening your belt where possible to put as much money towards your debt, and ensuring you are making payments on-time. Setting payment reminders or setting up autopay can be helpful if paying on-time is a problem.
What Is A Good Credit Score To Buy A House?
So here's what you came for: The credit score you need to get a mortgage to buy a house. Well, to be honest, there's no simple answer. If you're going through a lender with a fixed-rate, adjustable-rate, or two-step mortgage, the needed score will vary based on what city you're looking in, the lender you're applying with, and even the neighborhood you're hoping to live in.
But, generally, banks, credit unions, and lenders consider anything above 680 to be good enough score to get a mortgage, says Redmond. Again, mortgage rates tend to be tiered, so expect better rates with a score of 720 or 740. If your score is closer to 600, you can still get a private mortgage—but prepare to pay for it. You'll most likely need to go through a bank or broker that has a correspondent or wholesale relationship with many different banks, credit unions, and lenders, rather than your local community bank, Redmond says. You'll also have to settle for an often higher-cost, fixed-rate mortgage rather than an adjustable rate. Secondary market mortgages tend to be more expensive overall, since they come with higher closing costs, less flexibility, require private mortgage insurance, and require you to put property taxes and insurance in an escrow account as well.
Additionally, those with lower credit scores can also qualify for a government-sponsored mortgage loan or a federal housing authority (FHA) loan.