Do you know your credit score? Well, you're not alone! 40 percent of Americans don't know their credit score. Even more aren't happy with their credit score and don't understand how their score affects their access to loans.
Your credit score is an important indicator of your financial health and a significant factor that lenders use to determine whether you qualify for a mortgage loan. Understanding how credit scores work and how you can improve your score can help you buy the home of your dreams.
Keep reading while we dive deeper into understanding what a credit score is and how your credit score affects your access to loans to finance a new home.
What is a FICO Credit Score?
Your FICO score is your score on a credit system created by the Fair Isaac Corporation.
FICO scores are supposed to be the most accurate and are used by the majority of lenders. Lenders use your FICO credit score to determine whether you qualify for a mortgage and what interest rates and fees you'll end up paying.
FICO scores range from 300-850. Your score is determined by your credit history and credit report from the three major credit bureaus - TransUnion, Experian, and Equifax.
These are the variables that are factored in to determine your credit score:
- Your payment history (35%)
- How much you owe (30%)
- The length of your credit history (15%)
- The types of credit you have used (10%)
- Your new credit (10%)
How Does Your Credit Score Affect Access to Loans?
For the most part, a better credit score will give you better access to loans to buy a new house. This is because lenders see borrowers with better scores as a lower risk.
However, there isn't an exact FICO score needed to qualify for a mortgage.
This is because lenders take other factors into consideration as well and different types of loans have different requirements to qualify. Generally, if you have a better score, you'll be offered more competitive interest rates and more flexible repayment terms, including 15-year and 30-year options.
The exceptions to this are government-backed loan programs such as FHA and VA loans. If you qualify for one of these programs, you can still get access to loans with low interest rates, low down payment requirements, and flexible repayment options - even if your credit score isn't great. This is because these types of loans are less risky for lenders as they are backed by the government.
What Other Factors Do Lenders Take Into Consideration?
While your credit score is a major factor in determining whether you qualify for a mortgage, it's not the only factor lenders consider. Let's take a look at some of the other financial considerations that affect whether you'll qualify for a mortgage, as well as what rates you'll be offered.
After your credit score, income is probably the most important factor that lenders look at. Your income should be sufficient to cover the monthly mortgage payment for the amount you want to borrow. Lenders want to be sure you can afford your payments.
In most cases, buyers will need to make a down payment on their new home. The amount of the minimum down payment required will depend on the type of loan you are applying for.
The more you put down, the lower your interest rates will be. Your down payment is an investment that shows lenders you are likely to repay your entire loan.
Lenders consider whether you have readily available savings to make your mortgage payment in the event something happens with your regular income. It's generally advisable to have at least two months of mortgage payments in your savings account.
Debt to Income Ratio
Lenders also consider your other monthly debt repayment obligations. Lenders want to be sure you can afford to make all of your monthly payments and still have the majority of your income left over.
Finally, most lenders will take your employment history into consideration. Usually, they'll be checking to see if you've had a steady job for at least a certain period of time, within the same industry.
This shows that you're less likely to lose your means of income, and if you do, you'll be able to get another similar paying job easily.
How to Improve Your Credit Score
If you're interested in buying a new house, especially if it's your first time purchasing a home, a better credit score can save you time, money, and even help you get access to loans in the first place.
So what can you do to increase your credit score? Let's take a look at some of the best ways to boost your score.
Review Your Credit Report
The first thing you should do is make sure your credit report is accurate. You are entitled to a free credit report from each bureau each year.
You can learn more here.
Reduce Your Debt
A sure-fire way to improve your credit score is to reduce your debt. Pay down debt, especially on credit cards.
Be sure not to cancel your accounts, though. You want to keep your credit use to availability ratio as low as possible.
Pay Bills on Time
The best way to improve your credit score, in the long run, is to pay your bills on time. When you miss payments or make late payments, your credit takes a huge hit.
Become an Authorized User
Becoming an authorized user on a friend or family member's credit card can help boost your score. Each time a payment is made on the account by the primary user, your credit score will benefit.
Interested in Purchasing a New Home?
Buying a new house can be one of the most exciting life events, but it doesn't have to be a headache.
There's never been a better time for people of all income levels and backgrounds to purchase a home. Working with Gray Point homes is an easy way to take the stress out of home buying and learn how to get access to loans.