Nelson Zide
ERA Key Realty Services | 508-277-7794 |

Posted by Nelson Zide on 3/7/2018

If you’re hoping to buy a home in the near future, there are a number of financial factors you’ll need to consider.

One of the factors that all lenders will consider when determining whether or not to approve you for a mortgage is credit score.

In this article, we’ll lay out the minimum and ideal credit scores that are needed for getting approved for a home loan.

Determining Your Score

As you may guess, credit reporting is a complicated business. There are three main reporting companies that lenders use to determine your credit: Experian, TransUnion, and Equifax. These companies largely collect the same data about your finances, but can have minor variations. Lenders will take these scores and use the median or middle score to determine your credit rating.

Thanks to the Fair Credit Reporting Act, Americans have the ability to confirm the accuracy of their reports.

If you want to find your credit score, there are a number of online reporting agencies that will show you your report for free on an annual or monthly basis.

Minimum credit scores

Depending on the type of loan you’re applying for and which lender you are pursuing, minimum credit scores vary.

For those seeking first-time homeowner (FHA) loans, you’ll need a credit score of at least 580 to qualify for a 3.5% down payment. A score lower than this amount and you will need to put at least 10% down.

Since FHA loans are insured by the government, you are more likely to be approved if you have a low or “poor” or “bad” credit score (usually anywhere from 300 to 650).

Another type of loan that could help people with low credit is offered by the Department of Veteran’s Affairs. These loans, known as VA loans, are guaranteed, in part, by the government. However, the loans are still approved and distributed by lenders who all have varying minimum credit requirements. A good benchmark is that you’ll need a score of at least 620 to be approved.

Minimum isn’t ideal

While you may get approved for a loan with a low credit, this isn’t always a reason to celebrate.

Lenders use your credit score, among other things, to help determine the interest rate of your loan. A lower score often means a higher interest rate.

While 1 or 2 percent can seem like a small number, it can mean paying tens of thousands of dollars more in interest over the span of a thirty-year loan.

To illustrate the importance of one percent, consider the following. If you owe $200,000 on a home and intend to pay it over 30 years, you will pay $103,000 in interest at 3% and $143,000 at 4% - that’s a difference of $40,000.

Rather than shooting for the minimum credit score, a better approach would be to build credit while saving for a down payment. Someone with a credit score of 740 or higher will be seen by most mortgage lenders as an ideal person to lend to.

Of course, life doesn’t always allow for the ideal situation. So, do your best to save and build credit, and be sure to shop around for the best rates when you’re ready.

Posted by Nelson Zide on 12/28/2016

Everyone knows that their credit score will affect the mortgage they qualify for and the interest rate they receive. The details of how exactly those numbers are arrived at, however, are a bit hazy for the average prospective homeowner.

This confusion is due to a number of reasons. Chief among them is the fact that your average person isn’t well-versed in credit terminology or the variables that go into determining their credit scores.

In this article, I’m going to break down credit scores and credit bureaus, then discuss how each of them affects the mortgage rate you could receive. Then, we’ll talk about some ways you can boost your score to qualify for a better rate.

Anatomy of a credit score

Credit scores are determined by five main variables. In order of importance, they are:

  • 35%: your payment history on loans, bills, credit cards, etc.

  • 30%: your total debt amount for all of your accounts

  • 15%: length of your credit history (how long you’ve had open accounts for loans, credit cards, etc.)

  • 10%: types of credit you have used (auto loan, student loan, credit card… diversity of loans matters)

  • 10%: recent credit inquiries (such as taking out new loans or opening new credit cards)

To have a “good” (over 700) or “excellent” (over 750) credit score, you’ll need to focus on each of these factors. For most people, paying their bills on time over a long enough timeline is enough to get them into the excellent range.

But things happen in life. People forget to pay an important bill, they have financial emergencies, or they have to take out a loan for an unforeseeable expense.

The credit bureaus

So, who are the people that determine your credit score?

There are three main credit bureaus: Experian, TransUnion, and Equifax. Lenders will look at reports from all three bureaus to determine your rate. Due to the Fair and Accurate Credit Transactions Act of 2003, consumers are able to receive a free copy of their credit report from each bureau once per year.

Since then, companies like Credit Karma have made credit reports even more accessible. Users are able to check in on their credit as often as they want free of charge.

Since much of your credit score is out of your hands, at least in the short-term, what can you do to help boost your score over the next few months to increase your chances of getting a good interest rate on your loan? Two things.

Credit and mortgages

So, just how much of an impact does your credit score have on your mortgage rate? Having an excellent score can give you a full percentage point lower on your monthly interest rate.

One percent doesn’t seem like much, but over the period of a 30-year loan that can amount to tens of thousands of dollars that you could have saved if you had a better credit score. As you can imagine, having an extra $2,000 per year can be quite helpful to a new homeowner.

So, what can you do to boost your score?

Make corrections

Since you have access to free credit reports be sure to go through your detailed report a few months before you plan to apply for a mortgage. Report any harmful errors to help you increase your score.

Don’t apply for new credit

The period from now until you apply for a mortgage is an important one. If you make new credit inquiries (i.e., open up new credit cards, take out new loans, etc.), your score will temporarily decrease. Wait until after you sign on your mortgage to take out other loans.

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