Credit scores have a major effect on how lenders view borrowers. The FICO credit score takes several factors into consideration, and lenders look at these scores to make major decisions on behalf of their applicants.
If you are trying to buy a home with a mortgage, your credit score matters. In fact, having good credit can help you save thousands of dollars throughout a 15-year or 30-year mortgage.
How Credit Scores are Figured
As stated by a credit repair expert, credit scores are figured based on five factors. They include payment history, the amount owed on credit cards and other debts, the length of credit history, as well as the types of credit you have. The last factor is how much new credit you have.
The most important factor is payment history, and it takes up 35% of the credit score. The amount of money owed takes up another 30% of the score.
Ranges for Credit Reports
The score you have can be as low as 300 and as high as 850. The higher the score, the better, as it shows you have repeatedly made your payments on time, and that you are not overextended on your long-time credit accounts. The scores are broken up into ranges called poor, fair, good, and excellent.
People with good and excellent credit usually do not have any issues getting a loan for any reason, and especially for something like a home or car where the item purchased serves as its own collateral. But, people with fair and poor credit might not have the same ease.
Why You Should Check Your Credit Score Each Year
Your credit score is also called a FICO Score, which is named for the Fair Isaac Corporation that created the score and shared it with the different credit bureaus.
By law, you can get one free credit report each year from all three of the popular credit bureaus. Every borrower should use that opportunity to analyze their credit reports to find errors.
What Could Happen If You Have Fair or Poor Credit
If you have a fair or poor credit score, you should still be able to get a home loan. But the home loan will cost you more over the length of the loan. Unfortunately, lenders will compensate for the risk by giving the loan a higher interest rate.
Even if the interest rate is 1% higher, borrowers can expect to pay thousands of dollars more over the 15, 20, or 30 years of the loan.
Lenders do not just look at credit scores before giving new mortgages to applicants. They look at work history and income. They also look at assets you have as well as the amount of money you are planning to put down in the loan.
If your credit score is low, the lenders will want to see more assets, and they will look more closely at your work history and annual income. They will also ask you to put more money down, and the lenders will want to know where you got the down payment money.
In some cases, lenders will not allow down payments that were acquired from gifts. They will want to see proof that you earned and saved the down payment money on your own.
How to Get a Better Mortgage Loan
If you do not want to pay more or put more down, you have a few options for repairing your credit. The first thing you should do is get a free credit report from all three reporting agencies.
Check that they are consistent. If you see issues, you should contact the credit bureaus and ask them to fix the mistakes. The ones that matter the most are the late payments.
After you have taken the time to analyze and repair your credit report, the next step is to make your payments on time. Then, you should also avoid getting any new credit other than the mortgage. This might take a few months to make any difference.
You can also make a quick change to your credit report by asking a loved one if you can become an authorized user on their account. Be sure the person you ask has excellent credit so you can quickly improve your credit score.
Use the card occasionally, then watch your score increase as your loved one makes timely payments on the account.
Home loans, from conventional to FHA and VA loans, are affected by your credit score. Fortunately, credit scores are fluid, and you can make a difference that can save you money over time.
While USDA doesn’t set a credit score requirement when getting a loan, most lenders set at least 640 as their requirement. You could also check if you are eligible for approval of the loan if you check the USDA loan areas map.