When applying for a home loan, one of the first steps a mortgage lender will do is check your credit score to see if and for how much you can qualify.
What is a Credit Score?
A FICO credit score is a number that measures your creditworthiness based on reports from 3 main credit reporting bureaus, Transunion, Experian, and Equifax. The higher your credit score is, lenders will view you as less of a risk because you appear likely to repay your debts. Having a great credit score will allow you to get the lowest interest rate for your home loan. All three bureaus grade your credit history on a range from 350-850
How are Credit Scores Calculated?
Your FICO credit score is measured by the following factors:
- Payment history – 35% – How amount and frequency of missed payments is the largest factor in how a credit score is determined.
- Credit utilization – 30% – How much of your available credit are you using? If your credit accounts are maxed out, it shows lenders that you may not be able to manage debt responsibly.
- Length of credit history – 15% – How long your credit accounts have been open. Maintaining long term credit accounts shows positive financial responsibility.
- New credit – 10% – If you have recently opened multiple lines of credit at the same or within a short time frame, it lowers your score because it is a signal that you are in financial trouble.
- Credit mix – 10% – According to FICO, having a good mix of different revolving credit and installment loans increases your score because it shows you can manage different types of debts.
What is considered a good credit score?
Excellent credit score = 800 – 850
Great credit = 740 – 799
Good credit = 670 -739
Poor credit = 580-669
Bad credit = 579 and below
How can I check my score for free?
The Fair Credit Reporting Act requires the three major credit reporting bureaus to provide a free credit report once a year (Transunion, Experian, and Equifax ). Go to www.annualcreditreport.com to pull your free report.
The scores you will see by using many of the free online credit monitoring websites do not use FICO scoring system and will generally show you higher scores than what your actual FICO score is – so just be aware of that when applying for a home loan.
What credit score do I need to get approved for a home loan?
Many potential home buyers believe that they will not qualify for a home loan because they have a low credit score. That is now always the case, FHA loans, for example, might still be an option. The best way to find out is to contact one of our home loan professionals at Capital Mortgage for a free home loan consultation. Below are our general guidelines:
620 is the minimum score for conventional loans.
580 is the minimum for FHA loans with 3.5% down payment.
500 score is the minimum we can go and requires 10% down or more.
How can I improve my credit score?
Keep your credit card balances to less than 40% of the maximum limit is the best thing you can do to keep your scores up. Once your balance goes over 50% of the maximum limit, your scores can drop 50 to 60 points or more.
Having a zero balance on an open account can also lower your scores. Either close out unused accounts or put a small balance on them 30 days prior to having your credit report pulled.
Do you have more question about your credit score, or are would you like to find out if you would qualify for a home loan?
Please give us a call today, 208-854-7800
or contact us online.