The credit score is among the most important criteria required by lenders in the mortgage application process. If you decide to buy a house, the state of your credit score will determine if you are entitled to a loan and what interest rate is required of you to pay. Most prospective home buyers opt for loan since they are unable to pay cash up front.
This write up will explore credit score in details, what credit score is need to purchase a house, requirements to get a good credit score and what to do if you have a bad credit
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🏬CREDIT SCORE AND REQUIREMENTS
The credit score which is popularly refer to as FICO score is a numerical value ranging between 300 and 850, which depicts if an individual is credit worthy or not. This credit worthiness means the possibility of a person paying his or her loan if given. A higher value denotes higher credit worthiness, hence, an individual who has a credit score of 850 for instance is almost guarantee of paying back while a person with 300 credit score is unlikely to pay his debts.
There is a formula for calculating a FICO score. This formula which is the most popular scoring model was developed by Fair Isaac and Company (FICO). This model is utilized by most mortgage lenders for determining a person’s lending score and decides if he or she is a qualify candidate for obtaining the loan.
🍵 Below are factors to consider for determining a FICO score.
- Payment history– is part payments on your debt timely and regular?
- Amount owed– do you have lines of credit? How many? What is the balance on each? How high?
- Duration of credit history– have you been using credit? How long?
- New credit-do you have credit account? Do you open several ones in recent times?
- Credit types– which credit card have you? What combinations? Do you have combinations of retail accounts and installment loans?
Generally, while the first factor, (payment history) accounts for 35%, the second factor which is the amount owed accounts for 30% of the total score. The third factor goes for 15% while the fourth and fifth factors account for 10% each. However, variations in scoring depend on individual lender.
The complete information needed to calculate your credit score is available in your credit report. The credit report is a comprehensive history which reveals your debt management profile over the years.
An alternate to FICO score is the vantage Score. This scoring model was developed by Experian, Equifax and Transunion. Among factors it considers are: history of payment, the amount indebted and the duration of your accounts.
Credit scores from vantage Scores and FICO range between 300 and 850. Both models utilize different algorithms to enable your score vary widely.
Besides, credit score lenders also consider employment and yearly earnings of a person to ensure that he can pay on time every month. They wish to know if you have a steady income source.
The area or environment you wish to purchase a house is also another factor which lenders will wish to know. This is because outside factors may increase the risks and lead to increasing the credit score required to secure a mortgage loan.
You can see that different requirements to purchase a house exist; hence, your decision to become a home owner should not be taken lightly.
🏦IS YOUR CREDIT SCORE ENOUGH TO BUY A HOUSE?
You may probably ask what a good credit score to buy a house is. The truth is that there is no fix rule. The lender determines the minimum credit score required to buy a house. There are different levels of risk tolerance which different lenders can accommodate. There are also different criteria and cut off points which are also set to determine the minimum credit score which is acceptable to lenders.
In addition, various scoring models exist. There are variations in scores. This may depend on the scoring model adopted as well as the scoring model range. For instance, an individual having a credit score of 680 on a scale that goes up 950 differs from the one that has the same credit score on a scale that goes up 850. In a nutshell, a person with a good score on one system will surely have a good score on other systems.
There is always a fluctuation being experience on the credit score. This fluctuation is base on the information which is available on your credit report when calculating your credit score. You will be able to see the balance which appears on your last billing statement. Assuming there is a high balance on your billing statement before you embark on full payment, it will reflect in your credit score.
Whenever you intend to make a large purchase, endeavor to check both your credit report and credit score at least many months in advance to enable you have ample time to affect any needed changes. A good credit score will qualify you for a loan.
🧀WHAT TO DO IF YOU HAVE A BAD CREDIT SCORE
If you decide to buy a house and are limit by insufficient credit, you may likely become worry about putting down large payment or quitting the process of getting a loan. Although, bad interest can negatively affect the interest to be pay on a mortgage, it should not discourage you from buying a house.
Below are some essential tips to consider to qualify you for a mortgage in case you lack the minimum credit score to buy a house:
- Organize yourself– prove to your lender that you can pay your bills promptly, save funds and clear other debts. Be ready to provide the financial documents that will prove this.
- Get a co-signer– when you enlist a co-signer who has a good credit score can boost your chances of securing a house loan. Since the co-signer is jointly taking a responsibility for the loan, this will serve as a guarantee for your lender to quickly consider you.
There may be challenges associated with buying a house with bad credit. However, considering the above options can bring you back on track and fulfill your aspiration of owing your dream home.