How Excellent Credit Reports Benefit Homebuyers
Why Credit Scores Matter When Buying a Home
What’s so important about my credit rating? When buying a house, a good credit score can mean the difference of several hundreds of dollars over the lifetime of your loan. A good credit score will insure that you will get the best interest rate available.
A credit score in its most basic terms is a reflection on how well you pay your bills. Lenders want to make sure that you are going to pay them back.
To get the Best Credit Score:
• Pay your bills on time
• Have a history of using credit and paying it off
• Keep the amount you owe on credit cards, etc. below 30% of the total credit limit available.
• Should use your credit cards occasionally. Just be sure to pay off the balance as soon as possible (preferably each month)
• Age of credit matters, so you should NOT cancel a credit card because that will negatively affect your score. If you are struggling with the temptation of misusing the cards, only cancel one at a time, then wait a few months to cancel another one.
• Need to have several types of credit. Examples include: a major credit card (Visa, Master Card, etc.), a gas card, a major department store card, a personal loan, an auto loan, payments to utility companies, and rental or mortgage payments.
Remember you are establishing a history of managing your credit by paying on time, so take on lines of credit ONLY if you can manage them.
What is a good credit score?
Companies vary but generally speaking:
Excellent – 750 – 850
Good – 700 – 750
Fair – 640 – 700
Poor – 580 – 640
Very Poor – 300 – 580
So what Credit Score do I need to get a mortgage?
These are very general guidelines. Each institution sets their criteria, so to be certain of obtaining a loan be sure to talk to a loan officer. If you do not have a relationship with a loan officer, Edge Real Estate Services can give you a list of loan officers that we have worked with in the past.
FHA loan requirements are set by federal law. It requires a FICO score of at least 500. In addition, if your score is below 580, a minimum down payment of 10% will be required and your interest rate will be higher. You will probably be required to verify your rental payment to be sure you can withstand “payment shock”. Payment shock is the percentage of what you’re currently paying for rent compared with the new principal, interest, insurance + tax payment would be. For example, if you’re currently paying $1,000 per month for rent and your new payment would be $1,100 per month, the payment shock would only be 10%. You probably would not have any problem adjusting to the new payment.
If your FICO score is between 580 and 620, you would have to put 3.5% down. Your debt to income ratio would need to be at least 31%. Most lenders would also require rent verification. Although the FHA allows up to 100% gifted funds for the down payment, many mortgage lenders may not accept these funds. They may require up to 3 months of reserves (principal, interest, taxes, and insurance or PITI).
If your FICO score is 621 and above, you would qualify for a 3.5% down payment and a debt to income ratio of 46.9%. Rent verification is usually not required.
FHA Loan limits (that is, the home value) vary from county to county in Minnesota. Your Edge Real Estate Services Realtor or loan officer can help you make sure that the property you want will qualify.
Conventional loans requirements are regulated by the Federal Housing Finance Agency (FHFA). Freddie Mac and Fannie Mae are under the control of this agency.
Conventional loans require a minimum FICO score of 620-680 depending on the program. (An interest rate of 720 would get you the best rate). Mortgage insurance (PMI) is often required. You can have no late payments or outstanding judgements in the last year. If you’ve filed Chapter 13 bankruptcy, at least 2 years must pass; Chapter 7 requires 4 years. A foreclosure on your records would require 4 years to pass and at least 2 years must pass after a short sale for you to qualify for a conventional loan.
The income requirements include: at least 2 years of employment, debt to income ratio of 33-45%.
Property Requirements
Conventional Loans
• A home appraisal by a licensed appraiser from the area.
• An appraisal may call a work order that is a list of items that must be replaced or fixed. Normally this would need to be done prior to closing, but may be negotiated by both parties.
FHA Loans
• A home appraisal by a licensed appraiser from the area
• An appraisal may call a work order that is a list of items that must be replaced or fixed. Normally this would need to be done prior to closing, but may be negotiated by both parties.
Your Rights
You have the right to receive a copy of your credit report once every 12 months from each of the three credit reporting companies in this nation (Equifax, Experian, and TransUnion). The website https://www.AnnualCreditReport.com is a free site where you can go to request your report. This website also provides good information on how to read the report and protect your identity. There are other sites as well. You should monitor your credit report to help spot fraud. Checking your own score won’t hurt it, only hard inquiries (like when a lender looks at your credit when you apply for a loan or credit card) have a negative impact on your scores.
Credit Reporting Agencies
Trans Union: http://www.transunion.com/
Experian: http://www.experian.com/
Equifax: http://www.equifax.com/
If you would like to begin the loan application process and get pre-approved, get ahead with our HOME MORTGAGE CALCULATOR
