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What to Know About Credit Scores and Buying a Home
Most people, when buying a home, apply for a mortgage. Ultimately, when you apply for a mortgage, the bank decides how much they are willing to lend you, and at what rate. While there are a number of factors that affect the bank's assessment, your credit score does play a major role. Before you even start looking at Suffolk County homes for sale or Nassau County homes for sale, it's wise to have a good understanding of credit scores in relation to home buying. Here's what you need to know:
- What Is a Credit Score?
Basically, a credit score is a number generated based on your history of borrowing and paying back money. It's affected by the amount of debt you have, how many late payments you've made, how long you've had credit, and several other factors.
Your credit score tells the bank how likely you are to pay a loan back. The higher your score, the "safer" you are for the bank to lend to. - What's a Good Credit Score?
There are a few different organizations that calculate credit scores, and they all have a slightly different range for their scores. But generally, credit scores range from 300 to 850.
In most cases, a credit score between 670 and 739 is considered to be good, and scores between 740 and 799 are considered very good. If your score is over 800, you're in the "excellent" range. - What Score Do You Need to Qualify for a Mortgage?
To qualify for a conventional mortgage, you generally need a credit score of 620 or higher. Of course, the higher your score, the better the interest rate you'll be offered. So, if you're thinking of buying a home, it's still a good idea to work on raising your credit score – even if you're already over the 620 minimum.
Banks often give great interest rates to buyers with scores over 750, and sometimes even better rates to those with scores over 800. - Can People With Low Credit Scores Buy Homes?
If your credit score is under 620, you may still be able to buy a home, but you'll have to apply for a different kind of mortgage. FHA mortgages, for example, only require a 580 credit score if you have a 3.5% down payment. And you may even qualify for an FHA loan with a score as low as 500 if you're able to put 10% down. - How Can You Raise Your Credit Score?
If you're thinking of buying a home in the next 6 - 12 months, now is the time to really focus on your credit score. Even if you're only able to raise it a few points, doing so could save you countless dollars on interest if you're able to get a lower rate.
The best way to improve your credit score is to continue making all of your payments on-time. If you have any smaller, outstanding loans that you can afford to pay off, consider doing so. This will often decrease your debt-to-income ratio, which can raise your credit score.
Finally, if you have any credit cards that you've had open for years, avoid closing them. Having accounts that have been opened for many years helps keep your credit score high. Avoid opening new credit cards and taking on other debt, if possible, until you're in your new home.
Hopefully this post has given you some helpful insights into credit scores and home buying. When you're ready to start house hunting, contact us. We'll put you in touch with one of our real estate agents.