Your credit score can have a major impact on your ability to buy a house and the types of loans that are best for you. Not to mention how big your down payment needs to be, and how much interest you will need to pay. For first time buyers, knowing how much house you can afford can be a complicated question.
While it’s always best to speak to a financial professional about your specific situation and needs, there are some rules of thumb that can prepare you to ask the right questions.
How to check your credit score
First things first, what is a credit score anyway? Credit scores are a measure of your credit-worthiness or likelihood to pay back debt like a mortgage loan.
FICO scores are the most common method of calculating credit score used by all three credit bureaus: Experian, TransUnion, and Equifax. Each of these bureaus collects information from financial institutions in order to determine how safe or risky lending to you may be.
FICO scores range from 300 to 850. FICO defines general ranges for how lenders should think about scores:
- Exceptional: 800-850
- Very Good: 740-799
- Good: 670-739
- Fair: 580-669
- Poor: 300-579
You are entitled to a free report from each of the three bureaus once per year. Go directly to their websites to pull your report, and be aware that many other services will promise “free” credit scores as a way to get your information – go directly to the source for the most accurate results.
Because all three bureaus calculate credit scores separately, your score may vary slightly from one to another. As you’re preparing to buy a house, we recommend that you pull all three, staggering them a few months apart. This way you can see if your credit score is changing over time as you get ready to buy.
Credit requirements by loan type
Some loan types and lenders require a minimum credit score, while others are guidelines that may impact your interest rate but not prevent you from getting a loan. You may not need a perfect credit score to buy a house. Before you apply for a mortgage, it is good to consider which loan program best fits your needs.
Conventional loans require a credit score of 620. If you have what FICO would consider a good credit score, you should be able to secure a conventional loan to buy a home. In addition to your credit score, lenders will consider your Debt to Income Ratio (DTI) in determining whether you qualify for a conventional loan.
FHA loans are insured by the US Federal Housing Administration. FHA loans have less stringent credit requirements and some buyers can qualify with as low as a 500 credit score, though each lender may have requirements for scores over 580.
VA loans are insured by the Department of Veterans Affairs and are offered to military families and veterans as a way to make it easier for them to afford homes. Typically lenders expect a 620 or higher credit score for a buyer to qualify for a VA loan.
Jumbo loans are considered “non-conforming” because they fall beyond the maximum value that Fannie Mae and Freddie Mac can purchase. Because of the larger size of these loans, they carry more risk, so creditors will expect home buyers to have a credit score higher than 700 in order to qualify.
How to maximize your credit score
As you shop mortgage rates for your home purchase, it’s smart to focus on anything you can do to maximize your credit score. Whether you fall near one of the credit minimums per loan type discussed above or not, increasing your credit score will typically result in lower interest rates. A difference of 0.25% in your rate may not seem significant at first, but over the course of a 30-year mortgage it can amount to thousands of dollars in savings.
Pay your bills on time
Big bills like your mortgage, rent, or car payment will have the biggest impact on your credit. But when you’re buying a house, keep an eye on even the smaller bills. Every point matters when it comes to your credit score!
If you’re able to pay off other kinds of debt before applying for a mortgage, it may help your credit score. Talk to a mortgage lender like our friends at Gemtrago if you have questions about how to prioritize your debts as you get ready to buy.
Keep your credit cards open, but minimize the balance
Credit utilization is one of the factors that the credit bureaus use to determine your credit-worthiness. As you’re getting ready to buy a house, it’s a good idea to keep any credit card accounts open — closing them would reduce your available credit and increase your credit utilization.
While it’s best to keep your credit cards, you should minimize your balance whenever possible to show the credit agencies that you borrow money responsibly.
Check your credit report for errors
The credit bureaus are not perfect, and nobody knows your financial details better than you do. When you request your free annual reports, look them over carefully to find and report any errors that could be dragging your credit down.
Other ways to make your home more affordable
Having bad credit can make it more difficult to purchase a home, but it may not make it impossible. Work with a lender who specializes in your situation to understand all of the loan programs available to you and shop around — each lender may have different loan types, different requirements, and different interest rates available.
And, whether you are working to repair your credit or have excellent credit, our team of expert real estate agents at Trelora is committed to connecting you with the best lender, finding you the best home, and saving you as much money as possible.
Brady Miller, CFA is Chief Executive Officer at Trelora, Inc. Brady joined Trelora in August, 2018 as Chief Financial Officer. He moved into his current role later that year and is responsible for all daily operations and growth of the broader real estate business. Prior to joining Trelora, Brady was Chief Financial Officer of Leeds West Groups which is one of the largest, and fastest growing automotive retailers in America. Brady managed their real estate portfolio, financing, human resources, and accounting. He earned a Charted from the CFA Institute in 2016 and holds a bachelor’s degree from the University of Colorado, Boulder where he majored in Finance and Real Estate.