Finance

Home Loan Options and Credit Worthiness Needed

Improving your credit score should be a top priority if you plan to buy a home in the next two years. Many people choose an FHA loan for its advantageous rates and flexible requirements. However, you must still meet the minimum credit score for a FHA loan.

How Credit Scores Work

According to the Federal Reserve, 90% of U.S. mortgages borrowed in Q1 2019 involved homeowners with a score of 650 or higher. In fact, 75% had scores over 700. Moreover, just 10% of borrowers submitted mortgage applications with scores under 647. Let’s take a moment to understand what those scores really mean.

While FICO credit scores run between 300 and 850, the U.S. average is 704. This breaks down further into “good” scores between 700 and 749 and “fair” ones between 650 and 700. If your credit score exceeds 750, you have excellent credit, which is a powerful negotiating chip when you apply for a mortgage. However, that doesn’t mean you can’t get fair rates at the lower tiers as well.

So, by now you realize that raising your credit score as high as possible helps you get the best interest rates and options. Other factors that impact the mortgage review process include the size of the down payment, your income and the cost of the home.

How Can You Improve Your Credit Score?

Believe it or not, there are several easy ways to improve your credit score and help you get a fair mortgage interest rate. First, pay all your bills on time and pay off the complete balance whenever possible. Your payment history accounts for 35% of the FICO score, so improving this measure significantly increases your creditworthiness.

Tip: Set your bills on auto-pay. That way your payments are always on time.

Second, track your credit utilization, which makes up 30% of your credit score. Credit utilization is how much of your total credit you are currently using. If you have two credit cards with $10,000 limits, your total credit is $20,000. If you owe $15,000, then your credit utilization equals $15,000 divided by $20,000, or 75% — which is quite high.

Other Ways to Improve Your Score

While payment history and credit utilization make up the bulk of your credit score, there are several other factors to keep in mind.

Here are ways to work your way to a stellar credit score:

  • Keep your oldest accounts active
  • Don’t go crazy opening up new accounts
  • Don’t open new accounts while you are applying for mortgage loans

The length of your relationship with each creditor, called, credit history, equals 15% of your credit score. So, applying for new credit cards reduces the average credit history on your report. Also, 10% of the credit score deals with how many new credit inquiries appear on your account. That’s why it’s not a good idea to apply for new credit cards six months to one year before you secure a mortgage loan.

How Can You Tell Where You Stand?

Experian, Equifax, and TransUnion form the three major credit bureaus lenders use to gauge your creditworthiness. Each provides a free credit score each year.

Go to AnnualCreditReport.com or use trusted sites, such as Credit Karma, to get your scores. Chase and some other banks offer free credit scores to customers as well. You can pull your own credit report as often as you want without impacting your score.

Sit down and come up with a game plan for getting your score where it needs to be to obtain favorable rates. Remember to take the long-view and avoid becoming impatient with the process. All these steps will set you up for a strong financial future in your new home.

 

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