“What is a good credit score to buy a house?” Credit scores are often at the top of every prospective homebuyer’s mind when they begin their house hunt. Mortgage lenders pull credit scores for homebuyers from three major bureaus: Transunion, Equifax, and Experian. When lenders pull credit, they correlate to the middle of the three scores. If two homebuyers are using a loan, lenders will correlate to the lower-middle score of the two.
HOW ARE CREDIT SCORES REPORTED?
Credit reports will show all “open trade lines” or active accounts as well as any late payments and public record items like bankruptcies or foreclosures. Different industries have different scoring models when they pull credit reports. For example, the scoring model used for auto loans is very different from mortgage loans.
Often homebuyers worry that they don’t have a high enough credit score and are disappointed when they see that the score their lender is using is lower than the consumer credit score they are used to seeing online. Most consumer scores (like those reported on companies like Credit Karma) are about 20 to 30 points higher than mortgage scores.
DO HOMEBUYERS NEED A PERFECT CREDIT SCORE?
Contrary to popular belief, homebuyers do not need a perfect 850 FICO credit score to purchase a home. Ellie Mae reported that “FICO scores on all loans increased to 749 in April 2020, up from 742 in March.”
If homebuyers are still shy of a score of over 700, many other loan programs require lower scores. Conventional loans accept scores as low as 620, and government-insured FHA loans are even more lenient – these loans accept buyers with scores as low as 585 for a 3.5% down payment.
The benefit of having a higher credit score is that homebuyers can get lower rates. Homebuyers with scores closer to the lowest allowable limit can expect to get a rate of about 0.75% higher.
Homebuyers don’t need a perfect credit score to get a loan. Having a higher credit score can help them secure a lower interest rate for their mortgage, but there are many more forgiving guidelines for a homebuyer’s credit today.
Because credit scores affect interest rates so much, credit repair often pays for itself very quickly. It’s also cheaper and easier than many borrowers might suspect.
- Option #1: Rapid re-scores. This is the most basic of credit repair options. It typically involves the lender running “what if” scenarios to see how paying down balances will improve credit. Borrowers can then provide proof that balances are paid down and obtain a rapid re-score from the major credit bureaus. These re-scores cost a few hundred dollars typically and take from one to two weeks. Note that we typically do not pursue score improvements until borrowers are in contract for a variety of reasons.
- Option #2: Full credit repair. For borrowers with more serious credit issues, particularly if they involve incorrect data and misreporting, we often recommend a credit repair company. Full credit repair, however, can take several months and cost much more than a rapid re-score, but fees depend on the amount of work required. A repair company that we often recommend is Scorewell, as they have done great work for a large number of our borrowers.
You can read more about credit repair, and four other key credit reminders and misconceptions in a recent blog, here.
CREDIT SCORES & BUYING A HOME
Many factors play a role in qualifying a homebuyer for a mortgage. Lenders take into account “the big picture” of a homebuyer’s application – and credit score is just one part of it. The best way to determine if your credit score will qualify you for a loan is to speak with a Mortgage Analyst. JVM Lending’s expert team is available 7-days a week for questions. You can contact us here or at (855) 855-4491 or firstname.lastname@example.org.
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