Credit score ranges anywhere from 300 to 850, the numeric value between that range is used to indicate your creditworthiness. There are several factors that are evaluated in order to determine your credit score, it is also worth mentioning that conventional loans have different credit score requirements to government-backed loans.
● With conventional loans, it is generally recommended for you to have a credit score greater or equal to 620. Anywhere below that value, you might end up with higher interest for your loan.
● With Federal Housing Administration loans you’d want a credit score of 580 as a minimum. These kinds of loans are worth considering if your credit score is lower or if your savings are insufficient for a down payment.
● Veterans, qualified service members, and their spouses can access a special government-backed VA loan. Anything above 580 should be good enough just to be safe, but if your credit score is lower than that and you otherwise qualify for a VA loan it might be worth your time to see if you can get one regardless, as there is no industry-set minimum credit score for this sort of loan.
● If you intend to live in a qualified rural or suburban area and have an income that falls below the 115% of the area median income, then a government-backed USDA loan might be the correct choice for you. Ideally, your minimum credit score for a USDA loan should be 640, but some lenders only require a credit score of 620.
Now that we have gone over all the different types of loans, we can look into what influences your credit score and how you can improve it! Your credit report is one of the most important factors that come into play when obtaining your credit score, as it displays the history of your credit. Mistakes are not unheard of in credit reports, and they could potentially be damaging your score, you can check it for free with all three major reporting agencies one time per year. It is in your best interest to stay on top of your credit score, checking relatively often for any potential errors in order to put yourself in the best possible position. Knowing your credit score you can go over your options and look into conventional or government-backed loans in order to make the best choice for yourself.
There are three national credit reporting agencies, Equifax, Experian, and TransUnion, and they collect information from banks, companies, and lenders, and then formulate your credit score by compiling that information. Your credit score can be calculated in many different ways, however, the most used and well-known scoring models are the VantageScore and FICO (Fair Isaac Corporation) Score models. Lenders look at either of your scores (VantageScore matches the FICO model anyways).
The following actions influence your credit score:
● Whether or not you make payments on time
● In what way do you use your credit
● New credit accounts
● What types of credit do you use
● The length of your credit history
What is a good credit score?
As a basic rule of thumb, the higher the score the healthier your credit score. Because of this, most consumers attempt to get their credit score into the “good” bracket or above. Ranges vary between VantageScore 3.0 and FICO models, however, 850 is the highest possible credit score for both. Here are the brackets for FICO credit scores:
● Poor: 300 to 570: To a lender, borrowers with a “poor” credit score are very high risk, because of this they may request for borrowers to pay a fee or deposit to obtain a credit or loan, that is if they don’t just flat out refuse them in the first place. Should your credit score be in this bracket, you might want to seek a credit repair plan that suits you and follow it.
● Fair: 580 to 699: Borrowers in the “fair” bracket might see lower ranges of credit and higher interest rates when compared to borrowers in the “good” bracket.
● Good: 670 to 739: “Good” borrowers only have an 8% chance of turning “seriously delinquent”, according to data retrieved from Experian. On average, most borrowers are in the “good” bracket.
● Very Good: 740 to 799: Borrowers in the “very good” bracket will have a wide variety of options in regards to pricing and products.
● Exceptional: 800-850: “Exceptional” borrowers get access to the lowest interest rates, as well as better offers and even individualized perks and special offers from lenders.
How can I repair my credit?
If you currently have bad credit, don’t fret. You can control your credit, and you can actively do actions to improve it. Once you understand how your credit score is calculated, and look at your score, feel free to whichever method(s) you prefer from this list.
Your first move should be to check your credit reports for errors. Plenty of Americans live with credit report errors without knowing any better. Approximately one in every five consumers has some sort of “confirmed material error” on their credit report, according to the U.S. FTC (Federal Trade Commission). In the vast majority of cases, these errors aren’t beneficial and only damage your score when it should in fact be higher.
Here is a list of some of the most common errors:
● A report that wrongly lists a missed payment
● A report where a closed account or fully paid loan is still open
● Inclusion of one or several accounts that do not belong to you
● Inclusion of outdated credit utilization data
It is of extreme importance for you to ensure that your low credit score is not due to a mistake. Take a look at each of your credit reports, and thoroughly check each one of them for errors. Your credit reports should include instructions on the necessary process to report an error, should you find one. Once you report the error, your credit bureau will investigate the dispute and then report what they learned back to you. If they find that the error you reported was actually an error, they will then remove it and raise your score accordingly.
Slow and steady wins the race. Focusing on small, regular payments is one of the best things you can do to positively influence your credit score, as your payment history makes up roughly 35% of your score. Make minimum payments on all of your accounts every month and pay off all your credit card balances before they are due. By doing this you effectively lower your revolving utilization which will help you save on interest in the long run. You can set email and SMS alerts to remind you when a minimum payment on one of your credit cards is due soon, or even schedule auto-payments in advance, this way you can reliably make your minimum payments every month! If you have credit cards open that you do not use, refrain from closing them. Closing your credit lines lowers your overall credit and increases the percentage of your revolving utilization. Rather than closing them, order a small item on uber eats once a month and pay it off immediately.
Your credit score will rise if you reduce the amount owed on your credit cards. If you’re trying to raise your credit score it might be a good idea for you to prioritize paying off your debt, as your revolving utilization makes up 30% of your credit score.
Take a look at all your credit statements and make a list of everything you owe, make sure you include all your extra cards on the list. Afterward, do some introspection and think about where you can cut back on your expenses, even if it is just a couple of dollars, every penny off your debt counts! Lastly, avoid any additional expenses for your credit cards (besides the minimum payments) to quickly reduce your debt.
Next, you should consider getting a debt consolidation loan or balance transfer. A debt consolidation loan takes all of your outstanding debt and fuses it into a singular monthly payment. This helps your credit utilization rates and can also help you avoid missing payments! This is ideal for consumers with multiple lines of credit, by making it easier for them to keep up with all their payments. By doing this, however, you will be making a hard inquiry on your credit report, meaning that your credit score will drop by a couple of points, the benefits still outnumber the small loss of points in the end. You must focus on making on-time payments higher than the minimum amount once you get your debt consolidation loan.
Credit counseling agencies help you analyze your finances in order to find doable solutions for your particular credit and debt challenges. They go over your credit history and overall finances to find room in your budget for you to save as much as you can. They offer a variety of services additionally and might be able to contact your creditors for you to negotiate your payment amounts. Make sure you put a lot of thought into which credit counseling agency you go with, however, as some agencies will charge excessive fees that do not impact your debt. The main things you should ask about are fees, pricing, products and services, should they be reluctant to provide you with up-front information on their pricing structures/debt reduction tactics, go with a different company, preferably one that is transparent and honest with you.
How can you raise your credit score to buy a house?
After checking your credit score (you can pull your credit report from www.AnnualCreditReport.com), if your score is not high enough to qualify the minimum requirements for a loan then you can take some of the following steps to improve it before you actually apply for a home loan:
● Limit your applications for new credit from three to six months before you buy your home, because as was previously mentioned, hard credit inquiries may knock a couple points off your credit score.
● Prioritize paying your bills on time, using SMS, calendar or email alerts in order to keep track of payment due dates, as your payment history makes up 35% of your FICO score and is therefore the most influential factor.
● Pay off credit card balances if you currently have debt, as using too much of your available credit indicates loan agencies that you are overextended, which hurts your credit scores.
● Do not close old credit accounts, this way you will demonstrate that you have a strong credit history, which helps benefit your credit utilization ratio. As we previously learned, closing a card will reduce your available credit, which proportionally increases this ratio, and will ultimately negatively impact your credit score.
● You might have to write a letter of explanation for any negative items on credit reports.
What is a letter of explanation?
A letter of explanation is an opportunity for you to answer any questions a lender may have regarding your loan application. The reason they requested it could be due to a gift you received from your family, a collection action in your credit report, a gap in your employment, etc…This way your lender can count with all the information they may need when they fill out your application. A letter of explanation is a good sign, as it means you have not been outright rejected, your application probably looks fine and you just need to get a minor detail sorted out.
Moving on, before you move on to shop for your loan, work on improving your credit score from six months to a year.
What is the lowest credit score to buy a house?
The minimum credit score required to qualify for a mortgage varies depending on the type of mortgage you desire to obtain. At the start of this article, we saw that the requirement on scores for a U.S. Department of Veteran Affairs (VA Loan) is lower than the requirements for a Federal Housing Administration Loan (FHA Loan), and both have lower requirements than a conventional loan that you would obtain from a private lender. You can check out by exactly how much the minimum varies here:
Conventional Loan -> 620
FHA loan requiring a 3.5% down payment -> 580
FHA loan requiring a 10% down payment -> 500 (unless it is from Quicken Loans, which is 580)
VA loan -> 580 (with potential to negotiate with lenders if lower than 580)
● Conventional mortgages are house loans that adhere to Fannie Mae and Freddie Mac’s guidelines. They are not covered by any government program. If you have a good credit score – most lenders consider FICO® Scores of 740 or higher to be excellent – you can generally get a conventional loan with a low down payment and low interest rate.
● Conventional loans are exceptional for people who have good or excellent credit as they tend to require a higher credit score than most FHA loans. These loans often have the lowest interest rates and the most flexible payback durations, such as 15- and 30-year mortgages.
● Minimum Credit Score: To qualify for a traditional loan with Quicken Loans, you must have a credit score of 620 or greater. Various lenders have different standards, therefore a different score may be required.
● The Federal Housing Administration insures FHA loans, making them less risky for lenders and, as a result, easier to qualify for than conventional loans. They provide low-equity refinances with down payments as low as 3.5 percent and allow you to refinance up to 97.75 percent of your home’s worth.
● Borrowers with poor credit or who spend a considerable amount of their income on housing may benefit from FHA loans. An FHA loan may also benefit current homeowners who are underwater on their mortgage and could cut their monthly payment by refinancing.
● Minimum Credit Score: To qualify for an FHA loan with only a 3.5 percent down payment, you’ll need a minimum credit score of 580. However, there is no minimum FICO® score required to qualify for an FHA loan with a down payment of 10% or higher.
● FHA loans, on the other hand, are originated by private lenders, who typically have their own minimum credit score criteria. Quicken Loans, for example, requires a minimum FICO® score of 580 to qualify for an FHA loan.
● A minimum of one credit score is required to qualify for a regular FHA loan. If your lender acquires all three of your credit ratings, the middle score will be taken into account.Lenders will take the lower of the two middle credit scores should you be applying for a mortgage with your spouse.
Loans from the Veterans Administration
A VA loan, which is insured by the US Department of Veterans Affairs, may be a very wise financial move if you match the conditions. This is due to the fact that these loans do not require any type of down payment. Borrowers with poor credit can also take use of them.
Meeting the eligibility standards is the difficult part:
● You must be a current or former member of the United States military, as well as a member or veteran of the United States Military Reserves or National Guard.
● Spouses of service members who died while on active duty or who are disabled as a result of their service can also qualify for one of these loans.
Another advantage of these products is that you won’t have to pay for private mortgage insurance if you get a VA loan. However, VA loans have a one-time funding cost. This price is determined by your down payment as well as the sort of military service you have completed. If you are a member or veteran of the United States military and do not make a down payment, your upfront fee in 2020 will be 2.3 percent of your loan amount. The minimum credit score required: Borrowers qualifying for VA loans must have a minimum FICO® score of 580, according to Quicken Loans.
What would be the average credit score to buy a house?
According to Credit Karma members and researchers, the average VantageScore 3.0® credit score for consumers who established any form of mortgage tradeline in the last two years is 717 across the United States. They looked at the average VantageScore 3.0 credit score among homebuyers state by state using TransUnion VantageScore 3.0 credit scores for tens of millions of Credit Karma members who had a mortgage tradeline open on their credit report in the previous two years.
Their findings are as follows:
Credit ratings varied from 683 (Mississippi) to 739 (California) (New Hampshire and Washington state). When the results were broken down by city, the spread of scores was considerably greater.