What Credit Score Do I Need To Buy A House

There are many factors that lenders take into consideration when they qualify potential home buyers for a mortgage. One key factor is the credit score which can influence the amount you will be able to borrow and the interest rate you will pay. For these reasons having a good credit score is important before you apply for a mortgage.

What credit rating do I need to buy a house? is a common question people ask when decide to go looking for a mortgage. The answer to this question is that you could potentially buy a house with any credit score. You may think this is a crazy answer especially, if you have read elsewhere that the minimum credit score you needed to purchase a house is either 620, 660 or 750.

Credit Scoring Is Unnecessarily Complicated

However, there is method in this madness. The credit scoring system used by banks and lenders to qualify people for credit is unnecessary complicated and confusing. This scenario is made even more complex by different lenders using different lending criteria when choosing their perfect customer. Therefore, if one bank rejects a potential borrower, the same borrower may meet the lending criteria of another lender and qualify for the mortgage.

If one expert is saying that the minimum credit score is 660 then, this maybe accurate. But it may only apply to certain mortgage lenders and not them all. Other lenders minimum score may well be higher or lower. Which kind of makes the original question redundant.

Asking A Better Question

It is far better to ask the question How high a credit score do I need to get the best interest rates?  

Your credit score will determine the interest you will pay on the loan. Therefore, it is better to focus your attention on how high your score is rather than a minimum score to qualify for a mortgage. The higher your credit score the better as this will mean your cost of borrowing will go down.

What Can Affect Your Credit Score

The credit score is really like a grading system similar to your school report but rather than grading your school subject it grades how you manage your debt. To give them a value scores are measured on a credit score scale that uses a number range between 300 and 850. This is based on the Fair Isaac or FICO scoring system.

There are a number of factors that are taken into consideration when your score is calculated. Some of these factors are more important than others and each is weighted based on their importance. These factors include your payment history, length of your credit history, the amount of outstanding debts and the number of credit accounts you have.

Payment history and the total debt you owe contributes to over 60% of your credit score and it is these two factors that can determine your ability to obtain a good mortgage rate. In this regard it is essential that you pay your bills on time and ensure your overall debt level remains low.

How Your Credit Score Can Determine The Cost Of Borrowing

A mortgage is a huge financial commitment and one if not the biggest financial commitment most people will make in their lives. The difference in a percentage of point can mean paying tens of thousands of extra dollars over the duration of the mortgage.

For the best deals on interest rates you would need to have a credit score of 750 and over.  If your score falls between 660 and 749 there will not be huge difference apart from a few one hundredths of percentage points on the APR.

The real problems will occur if your score drops below 660. When this happens lenders will see you as more of a credit risk and to offset that risk they will increase your cost of borrowing. Credit scores that drop below 580 fall within the subprime category.

With credit scores this low you would expect to pay between 2 and 4 % higher interest rates compared to someone with a credit score of 760 and above. This means the cost of your monthly payments will increase,you will also have to pay a larger down payment and put up with more restrictive terms and conditions.

If In Doubt Get Pre-Approved First

Requesting for a pre-approved loan or financing is a good way to find out where you stand on the credit score issue. The lender will assess your financial background to determine your suitability. They will look at your credit score and other factors that will help them decide whether you are good credit risk. In simple terms, credit risk means your ability to afford and repay the loan.

As well as your credit report they will also check your employment and salary and your levels of debt in relation to your income. In this way you can know beforehand whether, you will be approved , how much you can borrow and most importantly the interest you will be expected to pay. You can also ask the lender to advise you your credit score.

What If I Don't Get Approved?

Don't panic, there is always a way. Many people who have a low credit score due to defaulting on loans in the past or they have been recently discharged from bankruptcy will find it very difficult in qualifying for many of the mainstream mortgages.

A potential solution can be found in considering  Government backed  FHA home loans. With this type of loan the Government take the risk of the borrower defaulting and not the actual lender. As the risk is removed from the lender the qualifying criteria is easier compared to a mainstream commercial mortgage loan. In the majority of cases people with a credit score as low as 500 could qualify.

Raising Your Credit Score

Due to the financial commitment of a home mortgage loan it would be better to wait and raise your credit score first to ensure you can qualify for the best deals.

If is also good practice to obtain copies of your 3 credit reports which you can get from the 3 major credit bureaus Experian, Trans union and Equifax. This credit report contains your credit history and this information is used by lenders during the application process.

Mistakes and old negative data contained within your report is a common way to lower your credit score. Therefore, it is important that you check and update your report on a regular basis.

If you need to raise your score by 50 to 100 points it can be achieved pretty easily. The important thing to remember is lenders want borrowers who have a good track record of paying down their debts. Therefore, pay your bills on time and avoid maxing out your credit limits.

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