Mention that you are considering buying a home and everyone from your parents to your REALTOR will talk to you about your credit scores. Knowing your credit score is extremely important because you can use it to get an idea about loans and interest. Unless, of course, you plan to buy a house with cash. For most homeowners a home mortgage is necessary and your credit will help determine what kind of loan you qualify for and the amount of interest you will pay.
Here’s some common questions home buyers have about credit scores:
What determines a credit score?
Lenders are looking for people with low debt, positive payment history, and a mix of account types. Your credit score is measured by approximately five categories and each one has a different weight of importance. The exact weight is not provided but it breaks out roughly into:
- payment history (35%)
- debt (30%)
- length of credit history (15%)
- new credit (10%)
- type of credit (10%)
Is there a minimum credit score required for a loan?
A loan is more likely if your score is 620 or above. If your score is lower than that other factors such as assets and a secure income would be used to see if a lender still considers you a safe candidate. Keep in mind that anything lower than a 620 may also result in a higher interest rate and it may be wiser to spend time raising your credit score first before buying a home. Also, having a high credit score doesn’t mean income and assets are no longer considered.
What are the best credit scores?
A credit score of 740 or above is an excellent credit score. Lenders are most likely to offer the lowest possible interest rate to buyers with that kind of credit score. The significance is that this can save homebuyers thousands of dollars over the length of the loan. Here is an in depth example of the difference 1% can make over the lifetime of a loan.
The good news is that even with a lower credit score, you can take steps to improve it within 15-18 months. It takes discipline and must be a priority but it’s an important first step toward buying a home. And – here are some things to avoid if you’re already ready to start the home buying process.
Have you been working toward a higher credit score in hopes of buying a house in 2017? Call DeSelms Real Estate today at 615.550.5565 and see how we can help you make that dream come true!