Do You Know Your Credit Score? Here’s What You Need to Know for Home Loans

I have a question for you: do you know what your credit score is? It’s an essential number when applying for mortgage loans, but a lot of people have no idea what their score is or rely on estimated models online like Credit Karma. Maybe you do know your credit score but think it’s too low to qualify for a home loan. Today, I’m going to break down what your credit score needs to be for each of the most popular loan programs and discuss the importance of credit scores. Read until the end because I’m going to tell you how to find your credit score for free and give you some tips on how to bolster your score so you can buy your next home.

Understanding Your Credit Score

When lenders talk about your credit score, we’re typically referring to your FICO score. FICO stands for Fair Isaac Corporation, and there are three credit bureaus under this umbrella: Equifax, Experian, and TransUnion. The higher your score from these three bureaus, the more likely you are to repay your loan. Lenders usually use the midrange score of the three.

The exact formula used by each bureau is slightly different and kept under lock and key, but they consider factors like payment history, debts owed, length of credit history, new credit, available credit, and unused credit. Your FICO score summarizes all these factors, providing lenders a shorthand to gauge your creditworthiness. It’s only a piece of the puzzle that determines your approval terms and interest rates, but it is an important one.

Minimum Credit Scores for Loan Programs

What credit score do you need to qualify for a home loan? It depends on the loan type. You might qualify for a loan program with a lower credit score than you realize:

• Conventional Mortgage: A credit score of around 620 is usually enough with as little as 3 to 5% down. This minimum score is set by Fannie Mae and Freddie Mac. The higher your credit score, the lower the down payment and interest rates available to you.
• FHA Loans: Backed by the Federal Housing Administration, the minimum credit score can be as low as 500 if you can provide at least 10% down. It’s a great option for people with lower credit but who have cash on hand. Typically, if your credit score is above 620, you can get the same FHA loan with only 3.5% down.
• VA Loans: Available to veterans, current military service members, and qualifying spouses, VA loans require 0% down. The U.S. Department of Veterans Affairs doesn’t set a minimum credit score, but individual mortgage lenders usually require a minimum score of around 620. Some lenders may go as low as 500, depending on circumstances.
• USDA Loans: Like VA loans, the U.S. Department of Agriculture doesn’t set a minimum credit score for USDA loans. Some mortgage lenders set a minimum of 580.

Navigating the Gray Areas of Credit Scores

Just because you meet the minimum scores doesn’t mean you will automatically qualify. Most lenders use an automated underwriting program that evaluates why your credit score is where it is. It also considers factors like debt-to-income ratio, assets on hand, and down payment amount. If your credit score is in the gray areas between the minimum required and more comfortable numbers (around 620 or higher), you might need a manual underwrite or to improve in other areas.

How to Check and Improve Your Credit Score

Once a year, you can obtain a free credit report from annualcreditreport.com. While it won’t reflect your score number, it will show your information and any potential red flags. You can also get your Equifax credit score directly from FICO at myfico.com, with updates available every month.

Tips to Improve Your Credit Score

1. Make Timely Payments: Payment history is a big part of scoring. Late or missed payments can significantly impact your credit. Set up autopay to avoid missing payments.
2. Pay Down High Balances: Focus on paying down high balances on revolving credit accounts like credit cards. This can start improving your credit within 90 days.
3. Keep Old Accounts Open: The length of your credit history impacts your FICO score. Keep your oldest accounts open to maintain a longer credit history.
4. Limit New Credit Applications: Opening multiple new accounts in a short period can hurt your score. Only apply for new credit when necessary.
5. Become an Authorized User: If you lack a credit history, becoming an authorized user on a loved one’s credit card can positively impact your score.
6. Dispute Inaccurate Information: Check for inaccuracies on your credit report and dispute them. Corrections can be made within 30 days.
7. Diversify Your Credit: Having a mix of credit types, like a car loan and a mortgage, can strengthen your credit score.

Work with a Trusted Lender

The best advantage when raising your credit score is to work with someone who knows how it will affect your mortgage loan. A trusted lender can find the right loan program for your financial needs and advise on the best steps to raise your credit score.

If you’re looking for a lender to help you lock in the right mortgage loan program, give me a call or text or CLICK HERE to visit our loan page. I’ve also linked annualcreditreport.com and myfico.com for your convenience. If you’re looking to buy, sell, or refinance a property in the Kansas City area, give me a call or text. My team and I look forward to being your Kansas City real estate experts. Until next time!