Financing a home will require some standard information about your income, debt, credit, and credit scores, along with a number of other items specific to your purchase situation. You will need to work with a mortgage loan officer to review what your financial plan is before you head out to shop for your new home. While you probably know about the first few items on the list, today we want to specifically talk about your credit score and how it applies to buying your new home. Now to answer the question, “Should you increase your credit score to buy a new home?”
Should You Increase Your Credit Score to Buy a New Home?
What is a Credit Score?
First, briefly, what is a credit score? Your credit score is an accumulation of data showing how well you have paid off your debt in the past, up to this date. It’s a number that guides creditors and gives them an idea about whether you have done a good job of paying your debts – and on time – or not. It is recorded by a number of different credit tracking companies so other businesses can review it when you want to apply for a loan.
You can pull your credit score yourself, or you can wait until your mortgage lender looks at it to get your numbered score. It’s a little different than your credit report, which is free. If you would like to access your credit score before you look for a home, you might need to pay a one-time fee. It might be worth it to see where you rank.
Credit Score Rankings
Now that you know what a credit score is, let’s discuss the numbers that make up a credit score.
Excellent credit: 720-850
Good credit: 690-719
Fair credit: 630-689
Poor credit: 629 or below
You’ll notice a good breakdown above of the credit scores given out by credit tracking companies. See where you fall in this list. Then, after you have your number for your credit score, you can start to determine if you need to work on increasing your score before you move any further with your home buying process.
If you have excellent or good credit, you probably won’t need to work on increasing your numbers. If you have anything below that, you might. It really depends on your situation. Your mortgage lender can give you some advice as well.
Types of Loans for Lower Credit Scores
An FHA loan can be the perfect loan for anyone with a credit score in the lower tiers. The minimum credit score number for a new home buyer is 580, and you only need to put down 3.5%. So it can be the perfect way to get in a home and start to rebuild your credit score at the same time.
A VA loan is another loan option for homebuyers with a lower credit score. A buyer with a credit score in the 620-660 range can get a VA loan.
This credit score rating is also similar for a conventional loan. See how viable it might be to get into a home?
What Does a Low Credit Score Mean When Buying A Home?
As you can see, having a lower credit score might not stand in your way of buying a new home. However, when you do come in with a lower credit score that probably means you’ll need to put down a larger down payment. And, if you don’t put down 20% or more, you will also need to include PMI into your figures. This will increase your monthly payment, so that’s something to consider. You will probably also get a higher interest rate on your new home purchase with a lower credit score.
Should I Raise my Credit Score to Buy a Home?
If you want to invest a small down payment but you have a pretty low credit score, you may want to consider taking some time to improve your credit score before you apply for a mortgage to buy a home. It’s a pretty simple process, and once you make good progress on doing so, you should come back and speak to your mortgage lender.
Some Quick Credit Score Repair Tips
Your credit score is compiled based on your ability to pay your bills on time, the amounts you owe, the length of history that you’ve been with a credit account, any new credit you might have, and the variety of credit you have.
Now, if you need to repair it or raise it, one of the first things you want to do is review your credit report to make sure there aren’t any errors causing problems to your score. From here, you want to pay down your debts; it’s important to do this in a timely fashion. Take on these tasks and keep at them for 2 or 3 months, and you could see a good improvement on your credit score.
Some of the best advice is to speak with your favorite mortgage lender to get the scoop on what they have to offer for new home loans and what they think would be a good idea for you based on your current credit score and going forward.
Your Friendly Memphis Area Real Estate Agent
Look to a highly-regarded and well-informed local real estate agent when you want to sell your house or buy a new home. One that will guide you and advise you during your home selling or buying. When you are getting ready to buy your new home, knowing your financial picture before heading out house hunting will make the process easier and more fun! Check out my other articles about buying or selling your home here in Memphis.
Click here to learn more about me and how I can help you with your house sale, new home purchase, or buying parcels of land. My skills and education are focused on what you need for a great real estate selling and buying experience. And, this is a great article talking about the benefit of hiring a real estate agent, here, in the Memphis area. I know how important buying your new house is; contact me at (901) 828-8919 or drop me a quick note firstname.lastname@example.org and we can discuss your options. I look forward to speaking with you today!
Angie Kelley, Crye-Leike Realtors
(901) 828-8919 or (901) 756-8900