Articles and Advice

Don't Let Your Credit Score Get You Down

This article gives you the facts about your credit score and homebuying.

If you're considering buying a house, getting your finances in order is a top priority. However, you may be worried about your credit score more than you need to.

Make no mistake about it, a decent credit score is critical; however, it doesn't have to be perfect! The following facts should help ease your mind.

A Perfect Credit Score is Rare
While it's a noble goal to strive for a perfect 850 credit score, it's also important to note that only 1.6% of the U.S. population with a credit score has achieved this feat. According to experts, a score of 760 is typically enough to qualify for the best loan rates. However, even if your score is lower than this, it won't likely prevent you from buying a house.

The Credit Score You Really Need
While you may have access to more lenders and get better offers with a higher credit score, don't give up on your dream of buying a house if yours falls in the lower end of the spectrum. In fact, the U.S. Federal Housing Administration (FHA), approves loans for homebuyers with a credit score of just 580 as long as you have a downpayment of at least 3.5% of the total home price.

In some cases, you might even be able to buy a house with a score as low as 500! In general, however, you'll need a score of 680 or better to get the best rates.

Your Income Plays an Important Role
While a lender might be willing to look beyond a less-than-stellar credit score, consistent income is critical. Note that the key word here is consistent. As long as the lender determines that you earn enough to comfortably make your mortgage payments, you don't need a super-high income. In fact, having a high income is less important than having stable employment.

With layoffs and furloughs running rampant right now, loss of employment is a factor that's more likely to derail your plans for buying a house. Expect that the lender will verify your employment several times during the period between when you first apply for the loan and your closing day. If you're laid off or fired before you close, this could lead to a denial.

Facts and Myths About Raising Your Credit Score
If you're interested in raising your credit score before buying a house, you can do some simple things. However, many people fall for myths that not only don't help raise their scores but could also lead to other problems. For example, shopping around for rates and offers from multiple lenders won't lower your score. What it likely will do, however, is save you a few thousand dollars in fees and interest payments over the life of your loan.

It's also a great idea to pay off debts before you apply for your loan, but you'll want to choose the right ones. Paying off revolving credit, like credit cards, will have a much greater impact than paying down long-term loans.

It's also important to note that negative marks on your credit history usually won't prevent you from buying a house. As long as your recent credit history is better and you have a decent score, most lenders won't deny you due to a blip in the past.

The Truth About Buying a House
Now that you know the credit score you really need before buying a house, you should be able to breathe easier. Remember to avoid taking out any new credit immediately before you apply and to keep making all of your liability payments on time. While you don't need a perfect credit score, the better shape your finances are in, the easier it will be to achieve your goal of buying a house of your own!

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Don't Let Your Credit Score Get You Down

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