Credit scores FAQ for home buyers
by Shawn Carvin, Senior Mortgage Banker
Credit scores (often called FICO Scores, named for the business which offers the scoring model utilized by many lenders) help banks and other financial institutions determine the relative risk of lending money to a given borrower.
What determines my credit scores?
Analysis of the total dollar amount of credit you have available, how much of your credit you are currently using (called credit utilization), and your history of paying bills on time, as well as several other factors are used to calculate your credit score. Credit scores range from 850, indicating superior credit (lowest risk), down to 300, which represents extremely poor credit (highest risk).
There are three national credit bureaus in the United States (TransUnion, Experian and Equifax) which compile credit reports on individuals. FICO or other credit scoring models summarize the results of each report into a three-digit credit score. The three scores are usually close to each other, but rarely the same.
What credit score do I need to get a mortgage?
A credit score is very important when qualifying for a mortgage loan. However, it’s only one component in the lender’s decision. Your employment history, income, present monthly debts, available down payment and reserves, the size of the loan, and the property itself all factor into the decision.
With that said, the general rule of thumb is that a credit score of at least 620 is necessary to obtain mortgage loan approvals from a wide range of lenders. Better interest rates may be available to applicants with scores of at least 720.
Although individuals with credit scores as low as 580 (or 500 with a 10% down payment) are technically eligible for the FHA mortgage program, only a very small percentage of such individuals receive approvals.
How do I improve my credit scores?
The two biggest positive factors on your credit score are making bill payments consistently on time, and not using an excessive amount of your available credit – staying under 20% is best. Other techniques also can be used to improve your credit scores, such as requesting the removal of outdated or inaccurate negative information on your credit bureau reports.
How soon should I start working on my credit scores?
If you are considering buying a house anytime in the next 12 – 36 months, now is the perfect time to begin optimizing your credit. A mortgage lending professional can provide you with the credit score reports lenders actually use, review your report with you to identify opportunities for improvement, and explain effective strategies for raising your credit scores. Time is your best ally when it comes to improving your credit, so don’t put off what you can start doing today.