Improving Your Credit Score Before Home Buying
Your credit score is one of the main factors in determining your qualification for a mortgage loan. This article will help you understand your credit score and how to clean it up before you buy a home.
Have you heard the phrase, “the best predictor of future behavior, is past behavior” ? This is, in essence, the goal of credit reporting companies. Because the structure of the U.S. financial system gives people the flexibility to borrow money within legal guidelines, the credit scoring system was established to show credit worthiness for individuals.
Credit can be extended in small amounts, like on credit cards or utility services when you begin to establish a credit history. Larger credit extensions like small business, auto, personal, or student loans may require an established credit history or a co-signer with an established history to acquire. However, when you are buying a home, having a good credit score is essential to qualifying for a mortgage.
Learn more about your ability to qualify for a mortgage in this “Mortgage Ready Checklist” article.
Calculating a Credit Score
Knowing what your credit score is made of, can help you understand the ways in which you can build a better score. Credit takes time to build and repair. Focus on making healthy financial decisions that make a positive impact on your credit.
There are 5 determining factors in calculating your credit score:
Your payment history should show that you consistently make payments on time each month. Missing payments and late payments can lower your score significantly.
Total Credit Owed
It is important not to max out your credit. A generally accepted rule for building a better score is to keep the balance on credit cards and types of revolving credit below 30% of the credit limit.
Remember that you should always be able to comfortably make at least the minimum monthly payment on all lines of credit.
Length of Credit History
Your credit score takes time to build, and showing that you have used credit responsibly over time helps to build your score as well. Even if you pay off a line of credit, it’s a good idea not to close the account entirely. Closing and removing older accounts from your credit history can lower your credit score.
It is okay to apply for a new type of credit, like a mortgage. However your credit score will be lowered if you apply for a number of new accounts in a short amount of time. This is why we suggest buying furniture, appliances, or using credit to buy other items until after your mortgage loan is closed.
Types of Credit
Credit reporting companies value different types of credit. Having a variety of credit types will raise your score.
Loans that are paid in installments like auto loans, student loans, and personal loans are one type of credit. Bank credit cards, retail credit cards, and gas credit cards are different types of revolving credit. Utility companies and property rental companies extend credit to you for their services and also report your bill payment to credit bureaus.
Qualifying Credit Score
At Aspire Lending we have different loan options available for potential home buyers, each with different credit score requirements. These are the current credit limits* for mortgage loan programs available:
- FHA Home Loan: 620 minimum credit score
- Conventional Home Loan: 620 minimum credit score
- USDA Home Loan: (Rural Home): 640 minimum credit score
- VA Home Loan: (U.S. Veterans): 620 minimum credit score
- Non-QM Loan: 540 minimum credit score
You should also keep in mind that having a score above 740 will help you get the best interest rate for your loan type.
*Update: The financial impact of the Covid-19 pandemic has resulted in Federal mortgage guidelines raising the minimum credit score to a 640 FICO. The length of time for this raised credit score requirement is undetermined.
We want you to have all of the information you need to reach your home buying goals. Speaking with a licensed mortgage consultant about your mortgage questions, is the best way to get answers about your specific financial outlook.
Reach out to us with your mortgage questions. We are here to be your mortgage experts!