Credit Score is one of the biggest criteria considered by the lenders for the approval of mortgage applications. These 3 little digits decide if you will move into your own new home or you will have to find another overpriced rental.
In this article, let’s find out what is a good credit score for buying a home and you can build it.
What is a Credit Score? – The Basics
A Credit Score is commonly referred to as a FICO Score, a number between 300 and 850, which represents a person’s creditworthiness. It shows the probability that if given a loan, the person will be able to pay it off on time. Thus a higher number represents higher credibility. This means a person with a high FICO score is more likely to return his debt and a person with a low FICO score is less likely to return his debt on time.
Note that you do not need a credit score just to get approved for a Mortgage loan. Instead, it depicts the overall financial situation of a person. This is why it is important that you know and understand your score and how it will impact your daily transactions.
A FICO score is calculated by considering the following factors, in descending order of importance
- Payment History – It shows if you have made timely payments on your debts in past
- Debt Load – It shows how many credits do you have, and how high is the balance on each?
- Length of Credit History – It shows how long have you been using your credit
- New Credit – This is to show if you have opened several new credit accounts recently
- Types of Credit Used – It shows the different combinations of credit that you use like credit cards, installment loans, retail accounts, and mortgage loans.
Typically, the first two factors Payment History and Debt Load make up 35% and 30% of your credit score respectively. The length of Credit History makes 15% while the last two factors New Credit and Types of Credit used to contribute 10% to your total FICO score.
Is 730 a good credit score?
A 730 credit score is right on the edge between a “good” and “excellent” credit score. Typically, a credit score ranging from 660 to 719 is considered a good credit score, while the 720 to 850 credit range is considered “Excellent”. But usually, it does not work like this in practice.
A lot of U.S. lenders will consider applicants with Good Credit Scores “Acceptable”. This means that the lenders will consider their application eligible for various credit products but may not offer the lowest-available interest rates to these applicants.
If you do not have a good credit score right now, fortunately, you can improve it quickly by reducing your Credit Utilization. A good Credit Score will provide you the access to a wide variety of home loans and credit card products. And if you consider improving your credit score further, it will get you the home loans at much lower interest rates and affordable mortgage terms.
A Credit Score of 730 is on the lower range of good credit score, therefore, you would probably want to improve it further before applying for a home loan. To improve your Credit Score, you need to work on all the factors collectively that contribute to your total FICO score.
What is a Good Credit Score to Buy a House?
What Credit Score is needed to purchase a house? This is the question that we often get to hear. However, the answer to this question is not that simple because there is no hard and fast rule for it.
Different Lenders have different eligibility criteria for approving Mortgage Applications. But if your credit score is good, chances are that you will get approved for a decent mortgage deal. A good credit score is simply a representation that you can manage your finances wisely. Therefore, lenders prefer applicants with high credit scores and offer them more affordable terms.
However, if your credit score is below 650, say 600, then it gets really difficult to get approved for a home loan. This does not mean though that you will not qualify, instead, in cases like these lenders consider other factors in making the mortgage approval decision. In fact, the term “Subprime Mortgage” refers to mortgages that are designed for applicants with Credit Score less than 620. For such applications, lenders consider solid assets, the reliable monthly income resource, and the down payment as the deciding factor.
Some borrowers can score a Mortgage with a credit score as low as 470. However, the point here should not be whether you can get approved for a home mortgage or not. The focus should be on the Mortgage terms that you will be offered by your lender. If you are not offered lower interest rates because of your poor credit score, you will end up paying a lot more money over the life of your loan.
Therefore, you should focus on improving your credit score first and then try to get your home loan.
What Interest Rate can I get with my credit Score?
Although a certain Credit Score does not assure a certain interest rate on your home loan. But, a credit score has a very significant overall effect on your mortgage rates. This is because the lenders use your “Credit Score” as a measure for your creditworthiness.
The lenders set your interest rate based on the risk you pose. The higher credit risk you appear to be, the higher will be your interest rate. On the other hand, if you have a lower credit risk, you will be offered a lower interest rate.
To give you a more clear idea, here is how your credit score will impact your Interest Rate
- Excellent (720 – 850) – Your Credit Score will have a good impact on your interest rate. You will be offered the lowest available interest rates by your lender.
- Good (660 – 719) – Your credit score will have a minimal impact on your interest rate. You will be offered 0.25 – 0.5 % higher than the lowest available interest rates.
- Fair (620 – 659) – This will not have a very good impact on your interest rate. You will be offered up to 1.5% higher than the lowest available interest rates.
- Bad (300 – 619) – This is not good. If you are offered a mortgage, you will have to pay a very high interest rate on your mortgage.
How to Build up Your Credit Score
If your current credit score is considered “Good”, you should definitely try to improve it further so that you may become eligible for the best available interest rates in your County. Here are some steps that you can take to boost your Credit Score
- Consider Credit Score Monitoring. Continually monitoring your Credit Score will help you to stay on the right track. You will be able to monitor what improves your credit score and what makes it drop. This way, you will learn what strategies you can take to improve your credit score in a short time.
- Make Sure to Pay Your Bills on Time. You need to have a good credit history of paying all your bills on time. These bills can include your credit card payments, utility bills, and other monthly payments. This will help you improve your credit score significantly.
- Try to maintain a Solid Credit Mix. The users who have multiple credit accounts tend to have a higher FICO score. But this does not mean that you should take on debts that you don’t need.
- Avoid High Credit Utilization. The FICO credit scoring bases about 30% of your credit score on this measurement. Try to keep the credit utilization across all accounts below 30% to keep a good credit score.
The Bottom Line
This article shows a rough estimate of the impacts of your credit score on your interest rate. Things may vary depending on your individual circumstances, geographic location, and the Mortgage Lender that you choose. However, the idea was to give you an overview of the importance of your credit score, what factors contribute to a good credit score, and how you can improve it.
If you have any Mortgage-related question, feel free to contact our Loan Officer now. The Mortgage Experts, at Affiliated Mortgage, will make sure to guide you properly so that you can get a mortgage deal that best fits your budget. We are the most trusted home loan providers in Rapid City, rated as the top mortgage company in Fargo, and the best mortgage lender in Billings.
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