What Is a Credit Score?
So, what is a credit score and why do you need it? A credit score is a number given by the credit report companies — between 300-850 — to grade your responsibilities to pay your debt to your creditors. The way that these companies report your credit score monthly is by receiving feedback from your creditors on how well you have been paying your debt. The higher the number, the better loan companies see you, because it helps them predict the chances of you defaulting on your loan. Credit report companies sometimes report different credit scores, so FICO score is the average score calculated from the different credit scores.
What Affects Your Credit Score?
In addition, some factors play important roles on your credit score. Knowing about those elements can help you make the right decisions the next time you think about applying for a credit card, getting an auto loan, or even applying for a department store line of credit. Below are the most crucial elements that affect your credit score:
- The length of your accounts: Lenders like to look at credit accounts that have been established ten years or older; however, it is not a set-in stone rule.
- The payment history: Lenders will look if there are past due payments or defaulted payments to your creditors that were over 30 days.
- The total amount owed against the total credit limits: Lenders will use a simple formula of percentage to calculate how much you owe compared to how much your credit limit is. For example, if your total credit limit — adding all your credit cards — is $10,000 but you owe only $3,000 of that amount, then your entire debt amount is 30%. Each lender set their limit for the amount owed.
- Collections, bankruptcies, auto repossessions and foreclosures: Negative items can affect the decision of your lender, but the criteria changes from one lender to the next. The older the negative issue, the less it affects your credit score.
Minimum FICO Credit Score Required for a Home Loan
As a result, different home loan programs need different minimum credit scores. There are many home loan programs available out there, from first-time home buyer to veterans. Each program has its own set of rules and guidelines. Below are some examples of credit scores needed by lenders for different home loan programs.
- FHA Loans – 580 Credit Score
- USDA Loans – 640 Credit Score
- 203k Loans – 620 Credit Score
- Convention Loans – 620 Credit Score
- Jumbo Loans – 700 Credit Score
- Cash-out Refinance – 640 Credit Score
- HARP – 620 Credit Score
- Home Equity Loan or Line of Credit HELOC – 680 Credit Score
How to Improve Your Credit Score
Unfortunately, there are no magic steps to increase your credit score instantly. However, there are some steps you can take to start improving your credit score, and with time your credit will improve.
Know your credit report: A mortgage specialist can request your credit report for you and will point out the negative items and what to do about it by giving you insights on how the lender will look at your report.
Work on your negative items: You may have to get in touch with collection companies and negotiate with them your debt, and you may have to dispute items that are not correct with credit report companies.
Pay down your debt: Owing 30% or less for the total amount of credit cards or lines of credits is the number that lenders want to see on your report.
When it comes to getting prepared to a home loan process, your credit score, the down payment, your job stability, the source of your income, and your income-to-debt ratio are equally essential elements for a home loan approval. However, your credit score will have a more significant impact on the eyes of a mortgage lender.
If you are serious about getting a home loan, give us a call today. Have a sit with one of our mortgage specialists so we can guide you on the right path to a successful home mortgage loan.
References:
Tressler, Colleen (7 Sept. 2016.). Why your credit score matters. Consumer Information. Retrieved from https://www.consumer.ftc.gov/
The Lenders Network (9 Jan. 2014.). Minimum Credit Scores Required for Mortgage Loans - FHA, USDA, VA. The Lenders Network. Retrieved from https://thelendersnetwork.com/
Yates, Randall. (22 Feb. 2017.). How to Improve your Credit Score by 100 points in 30 days. The Lenders Network. Retrieved from https://thelendersnetwork.com/
Investopedia Staff (20 Dec. 2004.). FICO Score. Investopedia. Retrieved from https://www.investopedia.com/