Last Updated on June 24, 2022 by Luke Feldbrugge
Your credit score is one of the most important factors in getting qualified for a home mortgage loan. But what is a credit score, and what makes it go up and down? What is a good credit score to buy a house? Get ready to learn all about how credit works!
What is a Credit Score?
A credit score is a number that lenders use to determine your borrowing potential. Your credit score depicts your current credit situation. There are three primary credit reporting agencies; Experian, Equifax, and TransUnion. Each credit reporting agency gathers credit data for millions of people. When you apply for credit, to buy a house, for example, your lender will order a copy of your credit report from a credit reporting agency. The agency then examines your credit data and attaches a credit score to the document.
The credit score, also called a FICO score, ranges from 300 to 850. Scores above 750 represent excellent credit risks. Lenders favor borrowers in the excellent rate with low-interest rates, attractive loan terms, and discounted loan fees. Individuals with lower FICO credit scores can still qualify for a loan, but they may pay higher interest rates or have less favorable terms.
You are entitled to get a free credit report once every 12 months. You can do this through the Federal Trade Commission. It’s a good idea to take advantage of these free reports to stay on top of your credit if you’re working on building it up. It also helps you stay on track of the accuracy of your credit score. Checking regularly can help mitigate issues if any fraudulent charges are being made in your name.
What Goes Into a Credit Score?
Since a credit reporting agency uses a sophisticated analysis of your credit data to determine a credit score, it’s important to understand what kinds of information is analyzed. The main items a credit score is comprised of is:
- Your past payment history
- Types of Credit (credit cards, car loan, student loan, etc.)
- Percentage of available credit used. For example, are you maxing out your credit card each month, or using a modest amount of credit available.
- Length of credit history, or how long all of your credit lines have been open
Since the three credit bureaus put a different weight on each component and look at each item slightly differently, your credit score can vary depending on which report you use.
How to Improve Your Credit Score
Does your credit score have room for improvement? Don’t worry; the fantastic thing about a credit score is that, since it’s a snapshot of your current credit status, your hard work can unlock an excellent credit score. It’s going to take hard work to improve your credit score, but once you understand how credit works, you can identify areas to make improvements. A few items to start with are:
- Pay down the balance on your credit cards. Make it a goal to pay more than the minimum payment each month.
- Strive to keep the total amount of credit that you’re using at less than 30% of the maximum available amount. For example, if you have a credit card with a maximum credit line of $5000, it’ll help your credit score if you keep your balance at no more than $1500. It might take time to free up this much of your credit, but a steady effort will pay off.
- Pay your bills on time. Late and missed payments are lethal to your credit score. Promise yourself that you’ll work hard to pay your bills on time.
- Examine your credit report for mistakes. Sadly, many credit reports contain errors that lead to unjustly low credit scores. Avoid this problem by obtaining a copy of your credit report from one of the credit reporting agencies and examining it for any errors. Make sure that you notify the credit reporting agency of any problems that you find in your report.
Does Your Credit Score Need to be Excellent to Get a Home Loan?
Lenders prefer to loan money to people with better credit scores because they believe that those borrowers are more likely to repay the loan. However, your credit score isn’t the only thing that lenders look at when sizing you up as a home loan candidate. Your goal is to demonstrate to the lender that you are a responsible borrower. Some ways to show that you’re a good credit risk include:
- Document your sources of income. Prepare to present pay stubs, tax returns, and any other papers detailing income. Lenders like to see that you have a steady source of income that is likely to last into the future.
- Maintain money reserves in a savings account. It’s a good idea to set aside funds each month to pay for unexpected expenses. Lenders appreciate it if you have extra money set aside, and it can help you to obtain a home loan.
- Amass money for a down payment on your home in addition to the extra savings. Typically, a sizeable down payment makes up for a less than perfect credit report.
Are All Lenders The Same?
Lenders are not all the same, and they don’t all have access to the same loans or interest rates. The good news for you as a borrower is that you can almost always find a lender to lend you money. The trick is to locate a lender who can connect you to home loan opportunities that work for your financial situation.
Homes for Heroes partners with exceptional loan specialists across the country who are dedicated to assisting Heroes with their financing needs. Sign up and we’ll connect you to one of our loan specialists in your community who will find a home loan that fits your budget. As a bonus, our loan specialists discount their loan fees to save you money.
The expert loan specialists affiliated with Homes for Heroes excel at matching borrowers with the right loans for them. For example, there are numerous home loan possibilities for buyers who have little money for a down payment. Your loan specialist will listen to you and inform you about the home loans for which you are eligible. They can also help you understand how your credit works for your situation and provide available options to fix your credit if needed.
