What is a Good Credit Score to Buy a Home? Plus Tips to Boost Your Score

Person checking their credit score

Your credit score should be one of the first things to look at when getting your financial affairs in order to buy a home. All home buyers at one point or another need to ask themselves, “what constitutes a good credit score for a home loan?” More importantly, “If I don’t have a good credit score, how can I improve it?”

Your credit score can make or break the likelihood of financing your home. To get the lowest mortgage rate, you need the highest credit score you can get. Even half a point difference can have a monumental impact on your mortgage loan and mortgage payment over the life of the loan.

Being a family owned and operated mortgage lender that’s licensed in all 50 states has made American Financing a credit score expert and we want to share what we know. Learn what a good credit score is all about and how to leverage it to buy your dream home.

How to check my credit score?

There are several credit scores you can look up from different credit agencies (Equifax, Experian, and TransUnion). Your FICO (Fair Isaac Corporation), which is the first company to offer a credit-risk model with a score, is the gold standard of models that the majority of financial institutions use. Checking your FICO score is no big mystery and it’s not only easy to check but free as well.

You’re entitled to one free copy of your credit every 12 months from each of the three nationwide credit reporting agencies. The Federal Trade Commission protects this right for consumers and can provide all the necessary free credit reporting information.

There are also reputable companies that can give you all three credit reports for free and even provide apps that can alert you when something on your credit profile changes like WalletHub.

How do credit scores affect interest rates?

A high credit score can save you thousands of dollars in interest over the life of your mortgage loan. Why? Your credit score represents your overall credit history and lenders consider it as a key indicator of how likely you are to repay your mortgage. It’s based on your credit report which includes the following factors below.

  • Payment history

  • Public records (bankruptcies, judgments, etc.)

  • Length of credit history

  • New credit accounts

  • Accounts in use

  • Credit inquiries

Let's consider an example. Say you're financing a $250,000 loan over 30 years. Interest rates may vary based on your FICO score. You could be looking at monthly mortgage payments as low as $1,228 or as high as $1,472.

What is a good credit score for a home loan?

The short answer is: it depends. The minimum credit score you’ll need to buy a new home, condo, or townhouse will depend on the type of mortgage you qualify for. In addition, lenders will review your financial history, debt-to-income ratio, and current debts to help them determine your interest rate and loan amount.

Requirement changes resulting from the Dodd-Frank Act

The housing market crash of 2008 drove then-President Obama to sign the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. Basically, tightening requirements in the mortgage industry and making it more difficult to qualify for a loan for people with low credit scores especially. If you have a low credit score don’t despair, there are methods and resources available to improve your credit score. 

Follow these strategies, and you're likely to find success:

Make your payments on time

Always make payments on time to improve your credit score. Your payment history accounts for 35% of your credit score and late payments stay on your credit report for seven years. Even so, the impact of late payments on your score does lessen over time.

Lower your debt and increase earnings

Your credit utilization ratio is the percentage of credit you are using on your credit card accounts and makes up for 30% of your credit score. Therefore, the higher the balance you have on your credit cards, the lower your credit score will be. Make sure to pay off your smaller debts off first and then start tackling larger debt.

While your income does not directly affect your credit score, it can definitely help take care of debt and affect your ability to get approved to finance a home. Try to get a side job to supplement your income or simply ask for a raise if you believe it’s merited.

Limit your credit applications

Applying for several credit accounts in a short amount of time is a red flag to credit reporting agencies. This makes you seem like you’re in financial jeopardy and counts against your score.

In certain situations, FICO understands that sometimes consumers apply for multiple accounts to shop around for the best rate. Multiple credit applications for student loans, car loans, or mortgages made within a 45-day window counts as only one application. Opening multiple new credit accounts in a short amount of time could impact your score by 10% so be cautious.

Closing credit accounts to temporarily raise your credit score could potentially hurt your credit score rather than help it too because it may influence your credit utilization ratio.

Settle your debt

Hiring a company to negotiate or settle your debt so you can pay a reduced amount is not in your best interest. You’ll likely be advised to stop making monthly payments until the settlement company can convince the creditor to accept a negotiated, reduced amount. This will, in turn, do more damage to your credit and may result in a mortgage loan denial.

Avoid dealing with debt collectors by staying on top of your payments.

For best results...

There are basically no shortcuts when it comes to improving your credit score. It really boils down to being patient and how you manage your finances, from paying your bills on time to the number of credit accounts you have. If you want the best mortgage rate then take the right steps to secure a solid credit score.

When you're confident that your credit score is healthy enough to buy a house, give one of our mortgage consultants a call. Conversations are simple, and there is never any pressure or obligation. If you end up being just shy of mortgage approval, our in-house credit care team can coach you through credit weaknesses and next steps. Affordable homeownership is within reach.

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