It’s a common online search for any prospective homeowner – what credit score do I need to buy a house? There’s a short, easy answer – lenders usually want to see a minimum FICO score of 620 – but it’s also an incomplete picture. If you’re in the market for a new home, here’s what you should understand about your credit score and the bigger credit report.
The Impact of Your Credit Score
To determine an interest rate, lenders consider a variety of factors. Your credit score is one of them, but so are things like your income, down payment amount, employment history, and assets. They’re not all weighed equally, either. For example, if you have a down payment of 20% or more, a lender may be willing to overlook a credit score below 620.
These days, banks and credit card companies make it easy to keep tabs on your credit score. You may even get monthly updates. The score you see from these sources is a good gauge, but it may vary by several point from the score your loan officer gets after pulling your credit report. That’s because what you’re seeing is an educational credit score – it’s not the score that a lender will actually use on your application. Lenders use specific industry credit scores that are customized to the product for which you’re applying. If you were seeking financing for a new car, for example, it would be based on a credit score developed specifically for that industry.
What’s a Credit Report?
Your credit score is part of a larger credit report. Information about your financial activity is compiled by three major credit reporting agencies – Equifax, Experian, and TransUnion. Your report will include details about your borrowing history, creditors, dates you opened accounts, payment history, and current balances. Public records, inlcuding short sales, bankruptices, and foreclosures, are also included. If you rent or have rented in the past, your rental payment history may also show up.
All of this information is neatly summarized by a FICO Score. This number is an industry standard for scoring creditworthiness, helping lenders make quick decisions about to whom they can reasonably loan money. There are five main components that make up your score, and they’re weighted differently – some have a bigger impact than others.
Past behavior is often a good indication of what you’re likely to do in the future. If you have a history of late or missed payments, it will be reflected here. In-full, on-time payments? Good news – those will also show up.
Impact on overall score: 35%
Carrying fewer outstanding balances tends to yield a higher score. If you have tons of debt you’re currently paying to multiple creditors, it has the potential to affect your ability to pay back your mortgage loan.
Impact on overall score: 30%
Length of Credit History
A longer financial history offers more insight into your behavior, which can make measuring borrowing risk easier for lenders. If your credit history is relatively short or nonexistent, there are fewer data points.
Impact on overall score: 15%
New accounts offer lenders minimal information, so the rule of thumb is simply not to open multiple new accounts at one time.
Impact on overall score: 10%
Responsible use of credit is important, but lenders like to see a variety of sources for that credit. If you make regular, punctual payments on credit cards, an auto loan, and student loans, that will have a positive impact on your FICO score.
Impact on overall score: 10%
Things like bankruptcies, short sales, foreclosures, and delinquencies will hit your credit score pretty significantly. In most cases, the best way to improve your score is to pay down debt, avoid new debt, monitor your score, and practice patience. It can take between two and ten year for recorded events – credit inquiries, foreclosures, unpaid tax liens – to expire from your report. But that doesn’t mean you can’t own a home before then. A smart first step is to reach out to an expert. Here in Reno, the Cushing Team is ready to answer your questions and offer recommendations. Give us a call today, and let’s see what we can do.