- Find your dream home with cathedral ceilings, and a three- car garage: check.
- Save up your pennies for a down payment: check.
- Have a decent enough credit score to secure a mortgage: …. Maybe?
Credit scores are important to the home buying industry, and as you might imagine, we deal with them a lot at Burnett Real Estate Team. Sometimes we find that even our clients who have a great score don’t entirely understand how credit works, or what impact it has on their ability to buy (or sell) a home.
In short, your credit score is an overview of your financial behavior. It impacts your ability to obtain loans, what your potential credit limits are, and what your interest rates will be.
Essentially, when banks look at your credit score, they’re looking to gauge your ability to manage your finances well. This is especially true when it comes time to apply for a loan or mortgage. It’s imperative—especially when attempting to purchase a home—that your credit score remain healthy, or else securing a mortgage will not be simple.
What Makes a Credit Score?
Credit is scored on a range from 300-850. This higher the score, the better. While credit scoring agencies may look at several different factors, there are five key areas that are considered when deciding your score:
- Payment History: How often you make your payments on time, such as with credit cards, rent, or utilities.
- Credit utilization: How much of your available credit you are utilizing, i.e. are you pushing your credit cards to the max every month.
- Length of credit history: how long you’ve been attempting to build your credit for. A longer history of responsible financial behavior is more desire than a shorter history, or one marked by late payments, debt, etc.
- New credit: the number of credit inquiries you’ve made.
- Credit mix: the diversity in types of credit you have. That is, auto loans, credit cards, revolving credit, etc.
How Does Credit Impact Me Buying A Home?
The higher your score, the easier it will be to qualify for a mortgage. It’s not unheard of for individuals with a credit score below 500 to secure a mortgage, though they can expect to have a significantly higher interest rate than homebuyers with a score above 600.
Lenders will consider how long you’ve been with your current employer, and the value of your assets if your credit score is low. On the other hand, if your credit is above 600 or even 700, you’re likely to secure a mortgage easily, with a competitive interest rate attached to it.
So… What Score Do I Need?
There’s no set score that dictates whether you can buy a home. However, to qualify for a Federal Housing Administration (FHA) loan, your FICO credit score needs to be 500 at the very least. To qualify for the FHA’s low interest rate advantage of 3.5% your score must be at least 580. These are government loans, however, and traditional lenders will generally expect a credit score of around 660.
A mortgage is essentially a loan, and like all loans, the lending institution wants to know that this is a smart move for them to make. If you have a history of paying your bills in full, and on time; your credit score will reflect that. As such, banks are likely to believe you’ll follow that same pattern with your mortgage.
To put it simply, while there is no set score that will guarantee you a loan; the higher your credit rating, the better off you’ll be.
Looking to Score Big?
If you’re looking to score a home in Bentonville, why not give Burnett Real Estate Team a try? Contact Us today and maybe on day you’ll be giving us credit for finding you the home of your dreams.