How To Get A Credit Score Needed for Home Loan

Do you know the credit score needed for home loan? Learn how credit scores affect your home loan and what you can do to improve it.

Are you in the market for a new home for you and your family?

If so, there’s a good chance that you will need to consider alternatives to buying your home with cash. According to ATTOM Data Solutions, just 34 percent of Americans have no mortgage on their property.

Obtaining a mortgage can help you purchase a home that you would otherwise not have the cash to afford. But it’s important to find an affordable loan with terms that are favorable to your financial well-being.

Read on to learn more about what your credit score is and the credit score needed for home loan.

Your Credit Score Impacts Your Loan Terms

It’s important to understand how your credit score impacts the terms of your home loan.

Your FICO credit score ranges from 300 to 850 and your score can vary slightly at different credit bureaus.

But what is a “good” score?

A “good” score can be subjective but when it comes to the credit score needed for a home loan, there are some general guidelines to consider.

If you are seeking a Federal Housing Administration (FHA) loan, your credit score should be at least 580. If you want a Freddie Mac or Fanny Mae loan, you typically need a minimum credit score of 640 or more.

But to get the best loan terms, you should have a credit score that is much higher.

Review Your Credit Report

If you have run a credit bureau report (or your prospective mortgage broker has), you should look over it for accuracy.

According to Javelin Strategy & Research, $16 billion was stolen from 15.4 million consumers in 2016 — an increase of 16% from the previous year.

The Federal Trade Commission found that 5% of consumers have at least one or more errors on their credit report, according to Zack Friedman at Forbes. These errors can negatively impact your score and prevent you from receiving the best loan terms.

Your credit report is an effective way for you to monitor any potential identity theft concerns. This is because your credit report will show the accounts that exist under your name and social security number.

By reviewing your credit report, you can get a true sense of what your score is and your current financial situation with regard to your debt.

It’s important to remember that if you have made recent changes to your debt situation — a new debt or large purchase on existing credit — these may not be reflected in your report right away.

Pay Down Debt

When a mortgage broker or other financial institution runs your credit, they will look at your total amount of debt outstanding.

If you have large amounts of debt on your credit report, this can keep you from the credit score needed for home loan.

The amount of debt you have is important to your financial institution because they want to know how much debt you have in your name. This helps them to better gauge some of the risks that come with making a loan to you.

By paying down your debt, your lender will be more confident in your ability to handle a new loan payment. This can also help increase the amount of money you can afford to borrow as part of your original mortgage.

Understand Credit Utilization Ratio

Your credit utilization ratio is a meaningful number to potential creditors and impacts the credit score needed for home loan.

The ratio is a measure of your existing debt to your available credit for each credit line you have. According to Investopedia, lenders want to see a ratio of 35% or less.

If you cannot pay down debt quickly and your credit utilization ratio is over 35%, consider asking a creditor if they would increase your credit limit. This can help bring down your debt relative to your existing credit.

Make Timely Payments

It’s not enough just to pay down your debts. You need to ensure your payments are made in a timely fashion.

This shows a lender that you are responsible for your bills and makes them more at ease with the idea of making your loan.

This goes for all your debts, including ones that are not traditionally found on your credit report.

For example, if you have unpaid fees for overdue library books, and these are sought by a debt collector, that collection agency could report your outstanding debt to a credit bureau.

By making timely payments on your debt, you can work towards the credit score needed for home loan.

Speak to Debt Collection Agencies

If you have debt that’s been turned over to a collection agency, this likely found its way onto your credit report.

This reflects negatively on your creditworthiness because it shows a potential creditor that you may be a risk of defaulting on your loan. Most importantly, it can keep you from having the credit score needed for home loan.

One way for you to improve your credit score is to speak to the collection agency about whether or not they’d remove their account from your credit report if you pay it off.

If they will remove that account from your report, you should pay off the debt as soon as possible to increase your credit score.

Avoid Numerous Credit Checks

You should know your credit score before you begin the mortgage process. This helps give you a better idea where you stand in the eyes of prospective lenders. It will also give you a measuring stick for how are you are from reaching a credit score needed for home loan.

But you should do your credit score research around the time you plan to buy a home and usually, not checking it more than a handful of times in a 30-day period.

Otherwise, you risk extra credit checks negatively impacting your score. These can last upwards of a year and keep you from receiving the best mortgage terms you deserve, based on your credit score.

Consolidate Your Debt

Having multiple forms of debt is not bad for your credit, but if you have multiple credit cards with debt balances this can keep you from achieving a credit score needed for home loan.

For example, if you have one credit card with a $200 balance and another with $450 debt, it is better to have one credit card with $650 debt.

If you are not in a position to consolidate all your consumer debt onto one card, try paying off the balances that are the smallest. This way your lender does not see numerous balances.

Since your credit score will be checked again before your mortgage is processed by your lender, you should get in the habit of sticking to one or two credit cards to make purchases up to your closing date.

Keep Old Debt on Your Credit Report

If you have old debt you have paid off, you should consider keeping this old debt on your credit report.

Why?

If your old debt was paid down each month and on time, this is perceived positively by lenders.

Old debt that you have paid off also shows a lender that you have a track record of being responsible for your loans. This works in your favor and can help you land the credit score needed for home loan.

Don’t Reflect Risk in Your Behavior

If you have always made minimum payments or payment-in-full, keep it up while you are looking for a loan.

You want a prospective lender to feel as confident as possible that you can pay back your mortgage. If you begin to do things like pay below the minimum payment or make your payments late, these can be red flags for your lender.

Questionable payment history or taking out multiple forms of new debt can be troublesome when you apply for a loan. If you are considering a new credit line or another form of debt, do not pursue it until after you have closed on your home loan. This way you can be sure you are avoiding risky behavior that can cause concern for your lender.

If you are considering a new credit line or another form of debt, do not pursue it until after you have closed on your home loan. This way you can be sure you are avoiding risky behavior that can cause concern for your lender.

Wrapping Up: Achieve a Credit Score Needed For Home Loan

Your credit score is an important part of your ability to receive the most favorable home loan terms.

By making the effort to pay down existing debt and doing it on time, you can improve your standing and reach the credit score needed for home loan. You can also do this by making your personal finances a priority and limiting your debt utilization ratio to below 35 percent.

These responsible decisions show a potential creditor you are serious about your finances. This bodes well both for you as a mortgage applicant and to the seller of the home you want to buy.

At New Florida Mortgage, we are a group of mortgage professionals with offices in Palm Beach Gardens. Our team is dedicated to working closely with you during the mortgage process. One of the ways we do this is by staying in regular contact with you.

Contact us today to learn more about how we can help you with your next home loan.