Ideas On What to Tell Buyers About Credit Scores

As a homebuyer, you need to understand that a good credit score is key to the home buying process. Lenders check your credit score to determine whether they will grant you a mortgage. If your credit score is high, you have a good chance of getting a mortgage with a better rate and terms. If your score is low, lenders will be concerned you’ll default on your mortgage and charge you a higher rate or deny you the loan.

What a credit score represents. Your credit score is a number that summarizes your payment history contained in your credit report. That’s the detailed document that shows how well you’ve paid off past debts, including credit cards, student loans, car loans, and wherever you’ve owed money. The scores are calculated by three credit bureaus—Experian, Equifax, and TransUnion—but usually all three scores are roughly the same.

The factors that go into your credit score. Here are the main variables the credit bureaus consider when calculating your credit score, along with their approximate importance expressed as a percentage:

• Payment history, 35%--whether you make your credit card and loan payments on time
• Debt-to-credit utilization, 30%--the amount of debt on your credit accounts divided by your credit limit on those accounts; it works against you if your debt exceeds 30% of your credit limit
• Credit history length, 15%--longer is better than shorter; ideally, you need at least six months of credit history to establish credit
• Credit mix, 10%--your credit score rises if you have different types of credit accounts—for example, credit cards, car loans, student loans, etc.
• New credit accounts, 10%--opening new credit accounts can raise your credit score because it can increase your debt-to-credit utilization, but it could lower your score because your average credit history length decreases each time you open a new account

Get a free credit report. You can get a free credit report from each of the three credit bureaus once a year at AnnualCreditReport.com. Get a copy from one credit bureau at a time, and you can get a fresh report every three months. This is the only source for free credit reports and it’s authorized by federal law. Check that all the information is correct and up-to-date and correct any errors.

The scores you need to get a mortgage. Credit scores range from 300 to a perfect 850. A good credit score is 700 and above, fair is 650-699, and low is 650 and under. The score you need to get a mortgage varies by the type of loan and the lender. In general, lenders look for scores in the high 600s to grant a mortgage, but you’ll need a score near the mid-700s to get the best interest rates. However, the Federal Housing Administration (FHA) grants mortgages to borrowers with scores as low as 500, with a 10% down payment. With a score of 580 and above, you only need a 3.5% down payment.

Note: Check your credit score months before buying a home. That’s because it takes time if your score needs improving. If that’s the case, mortgage professionals can show you the steps you can take.