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April 5, 2018

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What Credit Score is Needed to Buy a House

 

Our credit score is critical when applying for a mortgage. Since it is such an important factor for new home buyers, it’s helpful to know ahead of time what credit score is needed to buy a house. Many people don’t know their FICO score, and face a rude awakening when they want to step into home ownership. The good news is that there are things you can do to improve your credit score so that you can qualify for a home loan when you find
your dream home.
 

Your credit score will impact your home loan

It may sound like a simple question, but why do you need credit to buy a house? A house is a large purchase, and unless you can buy a home with cash, you’ll need a home loan. That loan must be paid back on a monthly basis along with interest. A credit score is the best way to predict how likely someone is to make their monthly payments in full and on time.

If your credit is low, you will have a difficult time qualifying for a mortgage. A low score may indicate that a person is prone to pay their bills late, or even miss their payments. On the bright side, if you have a history of paying your bills on time, you should have no problem qualifying for a home loan.
 

What credit score is needed to buy a house

No one can tell you an exact number as to what credit score is needed to buy a house. With that said, you’ll have a difficult time qualifying with a score below 580. There is a chance that you could still be eligible for a mortgage with a lower score, but your interest rate would be extremely high.

In order to qualify for home loan at a fair rate, you’ll need a FICO score of around 700 or higher. Lenders deem a score around 680 as mediocre, and a score above 740 as excellent. If you happen to fall under that 580 level, don’t panic! We can provide you with a few basic guidelines to help you understand and improve your score.
 

Credit issues that affect your eligibility for a mortgage

Regardless of your financial record, you’ll want to understand the types of issues that can affect your eligibility to qualify for a home loan. Remember, if you have any of these items in your past, there are ways to fix your credit to eventually buy a home.

LACK OF CREDIT

If you are a young adult, elderly, or are a new U.S. citizen, you may have a thin credit file. This typically means your credit history is too short, or your credit is relatively low. If you have a thin file, resist the urge to open more credit accounts. Instead, consider making regular small purchases with only three lines of credit. It is essential to pay these accounts in a complete and timely manner. This will show mortgage lenders that you may be responsible with a home loan.

BANKRUPTCY

Typically, anyone who has filed for Bankruptcy must wait at least two years before qualifying for a mortgage. This varies between Chapter 13 Bankruptcy and Chapter 7 Bankruptcy, but be prepared to provide a thorough explanation of the bankruptcy along with an approval from the court. Of course, this is assuming you have fully restored your credit and financial troubles.

LATE PAYMENTS

During the mortgage application process, the lender will establish that you have a track record of paying on time. Don’t worry too much if you’ve been late once or twice, it can happen to anyone. This doesn’t immediately disqualify you, but you’ll want to ensure that all future payments are made on time.

FORECLOSURE

There’s good news for those who have been through a foreclosure. The fact that you have owned a home shows the lender that you understand home ownership, and are committed to the process. These are often called “boomerang buyers” or “rebound buyers”. Although a foreclosure remains on your credit for seven years, boomerang buyers are only required to wait a period of three years before they are eligible for another home loan. Use this time to improve your credit score and build wealth.
 

Crucial tips to improve your credit score

The future is bright if you are willing to prepare your finances to buy a house. With the right steps, you can repair your credit and eventually qualify for a mortgage. There are many ways to boost your FICO score, but we recommend starting with these three simple tips: Pay your bills on time, keep your balances low, and refrain from opening new accounts.

1. PAY YOUR BILLS ON TIME

We can’t overstate how important it is that your pay all your bills on time. Late payments are one of the most common ways to ding your FICO score. They are also was of the easiest mistakes to avoid. Consider setting up auto bill pay with your accounts so you won’t forget when bills are due. At minimum, tell your phone to remind you when to make a payment.

2. CONNECT WITH AN LENDER SOONER THAN LATER

Many people don’t have huge financial problems, but for various reasons their credit score is just not up to par. According to Loan Consultant James Guzik, “Often times an individual can make a few simple changes that will dramatically boost their FICO score. By working with a loan consultant sooner than later, you can make these repairs before you submit the mortgage application. This can translate to thousands of dollars in savings.”

3. KEEP YOUR BALANCES LOW

As you prepare your finances to buy a house, you should plan on keeping your credit cards below a 30% credit utilization ratio. In other words, if you have a $10,000 line of credit, you should keep your balance below $3,000 at all times. Some experts recommend transferring money between your accounts to help you stay below the 30% level. Ideally, you should simply pay the balance down.

4. DON’T OPEN MORE CREDIT

The last recommendation to improve your credit score to buy a house is to not open (or close) more credit. Focus on maintaining the credit accounts you already have. The older your account history is, the better your score will be. So use your accounts regularly and pay them on time. This history will help boost your credit.
 

Advice for home buyers

So bottom line, what credit score is needed to buy a house? Their is no exact number to qualify for a home loan, but ideally you want a score above 690. For those who have a low FICO score, you may still qualify for a mortgage, but be wary of a high interest rate. If you have been through bankruptcy or a foreclosure, you’ll want to review our recommendations to help you get back on the path to home ownership. Finally, if you just need to improve your credit score to buy a house, remember to pay your bills on time, keep your balances low, and don’t open or close extra accounts.
 

If you have any additional questions about what credit score is needed to buy a house, please contact Nina Bjornstal at 206.730.0962 or email nina.bjornstal@sothebysrealty.com

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