What Credit Score is Needed to Buy a House – Are You Ready?

How to Improve Your FICO Score Before a Home Purchase

With the housing market having been strong for the last 6 years, many people are coming off the fence to buy a home but are being held back due to low FICO scores and not being credit ready. Although there are several government programs out there that allow for lower FICO scores you still want a least 620 or higher to get the best deal.

If you are planning on buying a home in the next 3 – 6 months or in the next year or two, you want to get credit ready for a home loan. In order to do so, you first need to understand how the credit score system works and learn the secrets on improving your scores so you can be certain your loan application will be accepted.

Understanding Your Credit Report

A credit bureau will not track all aspects of your personal financial life. Equifax, TransUnion and others do not not evaluate credit applications. These companies are simply organizations that collect and transmit four principal types of information.

What a Credit Report Covers

Identification and Employment date: Your name, birth date, address, Social Security Number, employer and spouse’s name are routinely noted. Employment history, home ownership, income and previous addresses should a creditor request it.

Payment History:Your account record with each creditor is listed, showing how much credit was extended to you and how much you have repaid to date. Related events, such as referral of an overdue account to a collection agency will be noted here.

Inquiries:Credit bureaus are required to maintain a record of all creditors who have requested your records in the past six months.

Public Record Information: Events that are a matter of public record and are related to your credit worthiness, such as bankruptcies, foreclosures, or tax liens, may also appear on your report.

Please download our step by step guide “Simple Steps to Home Loan Ready Credit” for an in-depth understanding of your credit report and how you can benefit from a higher credit score.

Home Loan Ready Credit

Mortgage Lenders Use the FICO Scoring Model

There are many reporting companies out there. For the mortgage marketplace the three most common credit bureaus are Equifax, Experian and TransUnion.

It can be difficult to understand how each of these Credit bureaus scoring systems work.

When a lender pulls your credit score they will use a median average of the three to give you a qualifying credit score. If it’s a joint application they will always use the lower middle score of the two applicants.

How to Raise Your Credit Scores and Get Credit Ready for Better Mortgage Rate

It is not uncommon to see a person improve their FICO score by 100 points or more by focusing on a few areas of their credit.

  • Keep your consumer card balances as low as you can compared with your available limits (ideally less than 30% of the credit limit)
  • Pay your bills on time, no exceptions
  • Avoid taking on in-store credit cards with high interest rates
  • If you have had the same credit card for years, use them periodically
  • Use credit only if you can pay the amount back quickly

If your card limit is $1,000 you should not carry a balance of more than $300 on that card. If you exceed this consider asking your credit company to raise your card limit so that your balance is less than 30% of your limit. This is a common metric that FICO applies to your credit score and it will help you to improve your score tremendously.

Your goal should be to have as little consumer debt as possible prior to buying a home so you are completely credit ready. If you’ve had derogatory events happen to your file, avoid using credit repair companies until you have done your own due diligence. Time can be a great credit healer but time alone will not fix your credit especially without a solid plan and the help of a trusted credit repair professional.

How to Get Access to Your Credit Scores for Free

Let’s face it, getting your credit score can be expensive. If you decide to work with your mortgage advisor more often than not they will provide you with a credit score for free with your loan application. If you think your credit score needs a lift and your credit history only has a few bumps and bruises, then the credit repair option might be right for you.