When you’re interested in buying a home, you must consider more than where you’ll live and how many bedrooms you’ll need. You must also understand what your credit score is and, if necessary, how you can improve it. You will need a certain credit score to take out a home loan for a house purchase. While you may understand this part, it can still be challenging to wrap your head around what good credit is and how it truly affects your ability to make a house purchase.
Understanding What a Credit Score Is
This is a number that’s achieved by calculating information that’s found within your credit report. It can range from 300 – 850. Since there are three major credit reporting agencies (Experian, Equifax, TransUnion), you’ll have three different credit scores.
Understanding how Your Credit Score is Determined
There are several factors that are compiled here. These include:
- How long you’ve had credit: The answer is the longer, the better
- Your payment history: Your score improves when you pay bills on time each month and it’ll drop when you default on a bill.
- How much credit you’ve used: You should use as little credit as possible. Your score benefits when 70% or more of your credit isn’t being used.
- Amount of debt you’re in: When you have too much debt your score will drop and your ability to make a house purchase will be negatively impacted.
- Credit adding up: Not just in what you owe, but how many you have. Having too many new credit accounts will negatively impact your score.
- Not having a mix of credit accounts: It’s actually favorable to have a mix of credit such as revolving credit or installment loans.
- Having settlements against you: Defaulting on a loan, filing for bankruptcy, having a foreclosure, making a settlement with creditors, all of these will also harm your score.
Understanding how Your Credit Score Impacts Your Ability to Get a Home Loan
When you have a high score, you’re seen as posing less of a risk to a lender. As such, they’re more likely to approve your loan for buying a home. They may even offer you a larger loan and do so at a lower interest rate. This information is according to the Consumer Financial Protection Bureau.
Understanding What Credit Score You Need for Buying a Home
The lender is the one who will determine what type of mortgage you’re eligible for. They’ll do this by looking at your score and some other factors as well (e.g. how much debt you have, how much money you have in your savings account). This is called your Debt-to-Income-Ratio and should 28% or less.
Understanding how Your Credit Score Can Change
If you’re denied the loan and you still need to make a house purchase, it’s not the end of the road even though it may feel like the end of the world right now. The good news is that you can change your score. These tips will help you improve and strengthen your score over time:
- Get a free copy of your credit report and look for any mistakes that are present because they can harm your score. Make sure you correct these before you apply for a loan for buying a home.
- Make sure you always pay your bills on time. This is where automatic payments and electronic reminders can be very useful. If you’ve missed any payments, make sure you get current and remain current.
- Try to pay off any debt you have, including balances on your credit cards.
- Speak with your creditors and establish a repayment plan within your means.
Understanding What all of This Means for You
Hopefully, now you have a better understanding of what this score is, how it’s calculated, and what you can do to improve upon it. When you’re interested in buying a home with Vitale Homes remember that your score will determine your ability to do so. However, Vitale Homes works with preferred lenders who have the financial expertise to guide you to the loan application process. If you feel as though you have a good score and you’re ready to purchase one of our semi-custom new homes in New Port Richey or Wesley Chapel, Florida, we invite you to give us a call today.
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