What Should My Credit Score Be To Buy a House?
When you are starting to think about purchasing your first home - or your 20th - your credit score is something that you need to be aware of. You’ve probably heard that your credit score can make or break the home buying process. However, you may not have been told what score you need.
The minimum credit score needed is not set in stone and can change often. Generally, you will need a credit score of 660+ to obtain a mortgage. Currently, conventional loans that are backed by Fannie Mae or Freddie Mac, require a minimum credit score of 620. FHA loans require the lowest credit score of 580.
Ok, so now we’ve set the guidelines for credit scores. Why are they so important?
Creditors (banks, mortgage lenders, etc.) look at your credit score as an indication of how responsible you will be with their money. The lower your score, the more of a risk you are to them. Because of this, they want to make sure if you can’t make your payments they aren’t left holding the too much of the bag.
The lower your credit score, the higher your interest rate will be. By having a lower credit score you will actually end up paying more for your loan then someone with a higher score. Additionally, you may be required to put more money down as well.
Ready for the good news? You can CHANGE your credit score!
Obtain Your Credit Report & Credit Score- The first thing you need to do is gather your documents to ensure everything is accurate.
- You may obtain a free copy of your credit report through the Fair Credit Reporting Act. Check out annualcreditreport.com or call 1-877-322-8228. Through this act, you are entitled to your credit report at least once a year from one of the three national credit reporting companies.
- You may also want to check out one of the free credit score sites such as creditkarma.com
Review Your Credit Report- Now that you have your credit report in hand, examine it closely to look for any inaccuracies. If you do notice any discrepancies, make sure to note those so you can file a dispute.
Ok, So You’ve Found an Issue, What Now?-
- Contact the credit reporting company in writing. Make sure to detail what you feel is incorrect and what the report should reflect.
- Ask the company to correct or remove the discrepancy from your credit report. It’s always a good idea to send these requests by certified mail.
- The credit reporting company will have 30 days to review your letter and they must investigate the discrepancy during that time.
- Once the investigations are complete, you will receive the written results of the investigation from the reporting company. This report will include any discrepancies that were found to be true or anything that will remain unchanged on your report.
A couple things you can do to keep your credit score healthy:
- Keep your Debt-to-Credit Ratio in Check- A good rule of thumb is 30% debt to credit ratio, the lower the better.
- Don’t Spread Credit Card Balances Across Multiple Cards- Your credit score considers how many balances you have spread across your various credit cards. If you must have a card with a revolving balance, keep it to one card.
- Have Good Debt on Your Report- Good debt shows that you are a responsible payer on your credit lines. The longer your credit history of payments, the better it reflects on you.
- Pay You Bills on Time- Seems simple, easy, and straightforward. This is a big one. When trying to repair or build your credit score – this is a big one!
Once you have your credit score under control - it’s time to figure out how much home you can afford…
The general rule of thumb is no more than 28% of your monthly gross income. Mortgage lenders will look for your monthly debt expense (car payment, student loans, debt payments) plus your mortgage payment to not exceed 36% of your gross monthly income.
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