Photo by Cookie the Pom on Unsplash
This Guest Blog is the first in a 4-Part Series on Home Loans. It is brought to you by my friend, Lisa Pogue, with DC Lending.
Preparing to purchase a home can be both exciting and stressful. You are hoping to find your dream home to create wonderful memories and to build equity. At the same time you may feel vulnerable as you make your financial picture available to Loan Officers and underwriters and worry that what they see might keep you from being able to buy. One of the biggest areas of concern to buyers is their credit score. This blog’s purpose is to give you the knowledge necessary to ensure your credit score and profile are where they need to be to be able to purchase a home.
What score is needed to purchase a home?
Most qualified home buyers have between a 640 credit score and a 780 credit score. Although many lenders can approve a buyer with a score less than 640 the interest rate the buyer will receive will be higher due to what the lender considers increased risk. In general, a credit score over 700 will give you a great interest rate and a score over 740 even better. Although scores can go up into the 800s it is not necessary to have a score that high to receive the best mortgage rates. Since your interest rate affects your monthly payment on your home loan it is worth the time to look at your credit score and profile before you start the home buying process and take the necessary steps to get your score and your credit profile where it needs to be.
What affects my credit score?
Please see the graph below to see how each credit behavior affects your credit score.
When looking at payment history, more weight is placed on the last 24 months. Also, being late on a Mortgage has a large impact on score and your ability to buy a home. Some lenders will allow one 30 day mortgage late in the last 12 months but many will not. Also, all debts are not created equal. For example mortgage debt is considered common but if someone has a large amount of credit card debt this is considered risky and will affect your scores especially if the balance is high. Capacity refers to how much of your credit limit you are using. Paying down your revolving debts to a balance of 20% or less of your credit limit is one of the best ways to quickly increase your scores since how you utilize your credit makes up 30% of your score. Revolving credit refers to credit cards and credit lines where you pay it down and are able to charge again versus installment debt where you pay something off completely like an auto.
There are two main scoring models used to determine your credit scores. FICO and Vantage. Lenders use the FICO scoring model to determine a borrower’s eligibility for a home loan. There are 3 credit bureaus. Experian, Equifax, and Transunion. Each of the 3 bureaus gives a different score to the borrower. The lender will ignore the highest score and the lowest score and choose the middle score for the borrower. If there are 2 borrowers on the loan, each will have a middle score and the lender will use the lower of the two. For example if borrower A has 740, 690 and 760 the score will be 740. If borrower B has 626, 650 and 595 the score for the loan will be 626 since that is the lowest mid score. One borrower’s credit can’t compensate for the other borrower’s credit because they are both fully responsible for the payment due.
There is another credit scoring model out there called Vantage. Vantage produces different credit scores than FICO but they are not the scores a lender will use. Companies like Credit Karma use the Vantage scoring model. The purpose of companies like Credit Karma is not to help you with your credit but to gather your information to sell to marketers. It can be helpful to look at broad trends in your credit but when a lender pulls your credit using the FICO model it will be different.
Each person can receive one free credit report per year. Although this report will have details related to who and what is being reported to the bureaus regarding you it does not contain scores.
The very best way to determine if you are ready to buy a home is to meet with a Loan Officer. At DC Lending, a locally owned Mortgage Company in Vancouver, WA, there are many Loan Officers ready to help you prepare to purchase a home. It is best to meet with a Loan Officer first before starting to look at homes and preferably at least 3-6 months before you plan to buy. This will allow them to offer ways to improve your credit and will give it time to improve. DC Lending has a credit advisor who specializes in helping borrowers improve their credit scores.This credit advisor will not only help give credit advice but can help to remove derogatory items and specializes in credit repair.
The best way to minimize stress during the home buying process is to start with looking at your financial picture, including your credit score, with a Loan Officer. Many borrowers make the mistake of starting their home buying on sites such as Zillow where they can easily fall in love with a home before they even know whether they are ready to purchase. Although this is tempting it is best to meet with a Loan Officer first and prepare so that when you do start the search you can look with confidence.
The Loan Officers at DC Lending are ready and honored to guide you through this home buying journey!
Click here to read Part II on How to Choose the Right Mortgage Lender.