If you’re in the market for buying a home, you need to check your credit score beforehand.
Your, “real,” credit score.
You likely have three credit scores. Each one is calculated according to your credit history by the bureau that issued it.
Your mortgage lender will assess all three of your credit scores and choose one to judge your application on.
If you know your credit scores, and if they are high, you can use the highest one to your advantage as you house hunt.
About 250,000 homes are foreclosed on every season.
So, you’re better off knowing this information than not.
Here are 5 reasons why you should know your real credit score.
You Require a Specific Credit Score to Qualify For Specific Mortgage Loans
Your chances of getting approved for a mortgage ultimately lies with your credit score.
And, the credit score minimum connected to the type of loan that you apply for to secure the mortgage differ from one another.
Sound complicated? It isn’t.
The higher your credit score, the less you’ll seem like a risk to a mortgage lender.
If you are approved relative to the minimum credit score requirement, mortgage lenders typically charge higher interest rates to mitigate risk.
And you need to know your credit score, your real credit score, relative to the kind of loan that you apply for your mortgage needs.
The average cost of a new home is about $362,000. Unless you’re accustomed to diving into swimming pools of gold coins like Scrooge McDuck, that’s a lot of money to try to pull from your own pocket.
Depending on the type of mortgage loan you apply for, you’ll require a FICO score of anywhere between 580 and 640.
Most people apply for mortgages via four kinds of loan types:
- FHA Loan
- VA Loan
- USDA Loan
- Traditional Loan
FHA Loan
The Federal Housing Administration guarantees loans for working-class borrowers with low incomes. FHA loan programs operate under the authority of the U.S. Housing and Urban Development.
During the Great Depression of the early 20th century, FHA loans were created to help ambitious Americans buy homes.
FHA loans are specifically designed to help people with less than perfect credit and low incomes.
In fact, calling an FHA loan a, “loan,” is a misnomer. The FHA guarantees a mortgage loan to the FHA-approved lender or bank who approves a loan to you.
The average credit score minimum to qualify for an FHA loan is 580. Depending on your circumstances, you could pay anywhere from 3% to 5% interest.
VA Loan
VA loans are mortgage loans that are partially sponsored by the United States Department of Veteran Affairs. Such loans are also known as Veteran Affairs mortgages.
Only active service members, veterans, spouses and surviving spouses are eligible. There are borrowing limits, but the VA has limits on how much it will guarantee relative to your loan.
VA mortgage interest vary according to your circumstance, but the average is about 3.6%.
There is no credit score minimum for VA loan applicants.
However, since the VA partially backs the mortgage, VA-affiliated lenders will require credit scores ranging from 580 to 620.
USDA Loan
A USDA loan is guaranteed by the U.S. Department of Agriculture to affiliated lenders.
These zero-down payment loans are offered to applicants who specifically in sparsely industrialized, rural areas.
The average interest rate for a USDA loan is about 3.25%.
There is no credit score minimum required of applicants applying for a USDA loan. However, since USDA loans are only a guaranty, affiliated lenders require a credit score of at least 640.
Traditional Loan
I don’t have to tell you how hard it is to get approved for traditional bank loan.
You’ll need collateral, meaning, you’ll need to have money or property of commensurate value to
collateralize the loan.
If you had such, you wouldn’t need the loan anyway.
The lower your credit score, the higher your interest rate. In most cases, the average interest is 4%.
OK, so why did I go through all of that? Because you have at least 3 different FICO credit scores.
And, the one that will be evaluated by your mortgage lender is out of your control.
You Have 3 Credit Scores and One of Them is the Real One
Credit bureaus are the literal gatekeepers of your credit history.
For example, credit bureaus keep track of your credit activity, payment history, bankruptcy history, how often you pay bills on time, and so on.
There are three credit bureaus (so, you essentially have three credit scores):
- Equifax
- Experian
- TransUnion
Each credit bureau applies a proprietary algorithm to calculate and assess your credit history.
Then, they evaluate your creditworthiness.
Next, each credit bureau gives you a credit score based on your credit history and their algorithm calculations.
Why are there three credit bureaus? No one knows for sure. Each may have serviced particular regions in the beginning.
OK, so which one is your real credit score? You may be able to decide that depending on the circumstances.
You are allowed a free credit report from each bureau annually.
So, you can check each report, check the highest and middle score, and apply for a mortgage armed with those scores.
The better your credit scores, the more likely a lender could accept your score.
Sounds like an arbitrary system to assess your, “real,” credit score?
Well, its essentially what your mortgage lender will do anyway.
Your Mortgage Lender Will Essentially Choose Your Real Score
Your mortgage lender will usually require a credit score between 580 and 620 just to apply.
However, there is no set, universal credit score number that you must have to apply for a mortgage.
Most mortgage lenders will request all three of your credit scores. Then, they will arbitrarily choose one to decide your creditworthiness and application risk.
A mortgage lender may choose your highest credit score number.
Or, they will choose the middle score between the highest and lowest as your application score.
So, you only have so much control when it comes to the arbitrary choosing of your, “real,” credit score.
What is a Good Credit Score to Have When Buying a House?
Check all three of your credit scores. The higher the score, the more “real,” it will be and accepted by your mortgage lender.
You should have a FICO score between 670 and 739 to have a significant hope of getting a mortgage without exorbitantly high interest rates.
Another great reason to know your credit score is to know whether or not you should pause the house hunting activities.
Know Your Credit Score to Assess Application Strategy
Sometimes in life, you must hurry up and wait to get what you want.
Never apply for a mortgage without knowing your real credit score.
If you know all three, then you can have a better idea of your chances before applying.
Wait two or three years. Use the time to rehabilitate your credit score.
While waiting, use your credit cards responsibly and pay bills in full on time every time.
Your credit score will increase incrementally.
It’s better to know your credit scores now and strategically wait to improve them later than to apply now while ignorant of all three.
Especially if all three of your credit scores are deficient.
Read More
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Allen Francis was an academic advisor, librarian, and college adjunct for many years with no money, no financial literacy, and no responsibility when he had money. To him, the phrase “personal finance,” contains the power that anyone has to grow their own wealth. Allen is an advocate of best personal financial practices including focusing on your needs instead of your wants, asking for help when you need it, saving and investing in your own small business.