Credit affects every aspect of our lives, from getting a job to buying a car to buying a house. Back in the day, if a potential buyer didn’t have “A” credit, he didn’t buy Penticton real estate. Today, thankfully, it’s a little different.
The terms under which former mortgage lending labored have become broader, encompassing lower credit scores and offering terms with which potential home buyers can live. So what credit score do you need to buy a home?
Why Is Credit Score So Important?
Lenders loan money to those they think will repay the loan. Credit scores tell a lender that a potential home buyer has paid his loans on time, that he has a credible income to debt ratio, and that he doesn’t have too many credit cards or loans. That’s how bankruptcy happens.
Which Credit Bureau Report Is Used To Buy A Home?
Each lender is different, of course, but most use FICO scores. FICO or Fair Isaac Company gives the three major credit bureaus their scores, so most lenders simply go to FICO first. The scale of credit numbers is the same for all of them.
What Score Is Best For Buying A House?
Lenders are ecstatic if they see a credit score between 750 and 850. However:
>A good score is 700 to 749
>A fair score is 650 to 699
>A poor score is 600 to 649
>A bad score is 599 and below
How Does The Credit Score Affect Buying A House?
Many people know they need a good credit score, but they aren’t sure why. Here’s why. You will make a down payment on the house of your dreams. You will pay interest on the mortgage loan.
Your credit score affects the down payment amount you’ll pay for a house. With conventional loans, you’ll pay 20 percent down payment on a house. If you have lower credit, though, you won’t be able to pay that much. Those potential buyers are only asked to pay 3.5 percent down. Buyers whose credit is 600 and up will pay ten percent down payment.
Your credit score also affects the interest you’ll pay on the mortgage loan. Those with good credit able to pay 20 percent down on a house, will pay a better, lower interest rate.
Those unable to pay much on a down payment will pay the outer limits in interest. This means that for a credit score of, let’s say, 590, a potential home buyer will pay 5.36 percent for a payment of $1,676 added to his monthly payment. In all, he’ll be paying $68,040 on the loan.
- Can I Buy A House With A Bad Credit Score?Yes, you can. Most city, county, and state governments have grants and other funds designated to those who need help with down payments for home loans. Federal agencies also stand ready to help. One of them is the FHA or Federal Housing Administration which is part of Housing and Urban Development or HUD.
In many cases, an FHA first-time home buyer loan is all that’s available. Some of the benefits of FHA loans are:
>Easier requirements. If you have a credit score of 580 or higher, you will pay ten percent down payment. A score lower than 580, and you will pay ten percent down payment.
> Lower interest rates.
> Lower costs and fees.
> No credit at all. If you have no credit, there’s still hope in the form of alternative programs.
How Can I Improve My Credit Before Buying A House?
First, put off buying a house for at least two to three years. Lenders need to see a track record on credit reports. They will see that you have worked to improve yours.
Pay off all credit card debt every month on time. Pay off any loans on time. Do not open any new credit accounts until you’ve gotten your income to debt ratio down. It should be at or less than 50 percent.
Pay the rent, car payment, insurance, and even the power bill on time. If lenders see that you’re overwhelmed and can’t pay monthly bills on time or at all, you won’t look like a good risk. They will hesitate to loan you money.
Check your credit report regularly to see if derogatory statements, mistakes, or identity theft is on the report. Strive to settle these things, so your credit will look very good. Then you can look for a house.