4 Credit Tips for Buying a New Home
By Scott Sheldon
This may come as a surprise, but you don’t need a perfect credit score to buy a home or get a mortgage.
In some cases, your credit just needs to be sufficient. Good, bad, ugly or indifferent, as long as your credit score matches the criteria of the mortgage size and property type you are looking for, you may be able to get financing.
Here’s a quick cheat sheet of the top three most commons mortgages and their basic credit score requirements.
Conventional loans. You generally need a credit score of 620. However, anyone with a 620-679 credit score should expect to pay higher interest rates and fees.
FHA loans. You’ll generally need a credit score of at least 600. There are lenders that do FHA Loans with credit scores as low as 580, but it’s going to come at a cost. Expect the lender to go through your file with a much finer-toothed comb if your score is at 620 or below. Conversely, if your credit score is 620 or higher, not only will you get better rates and fees, but you’ll also have an easier loan process.
Jumbo Loans. You’ll generally need a credit score of at least 680. You will also generally need at least 30% equity when buying or refinancing a home. A 700 or better score yields better rates and terms and requires less down (possibly as little as 20%).
Of course, a good credit score generally helps you net better terms and conditions. If you have some credit challenges preventing you from getting a mortgage with competitive rates and fees, here are some strategies straight from a mortgage pro that could improve your situation.
1. Pay Down Debt/Rapid Re-Scoring
Some mortgage lenders have a credit doctor service, known as rapid re-scoring, available through their credit reporting company. This service allows them to run statistical credit modeling: the lender plugs in a certain credit score needed, an algorithm analyzes your complete credit portfolio and outlines what can be done to get you to that aforementioned threshold.
Oftentimes, high credit utilization (the amount of debt you are carrying versus your total available credit) is the culprit for a low score. In those instances, paying down certain credit accounts could make you more creditworthy — and mortgage eligible — within short period of time.
If buying a house is a longer-term goal, time can be your friend. Credit history is a large component of a healthy credit score. Make your payments on time, keep the amount of debt you are carrying low and avoid late payments of any kind. These smart spending habits show that you are responsible with your obligations and will bolster your credit score eventually.
3. Quit or Resolve Disputes
In order to get a mortgage, you generally cannot have any accounts in dispute on your credit reports. At the same time, simply removing a dispute from your credit report can make your credit score drop. The reason? Credit scoring models generally ignore information being disputed, like an account with a late payment, which would otherwise hurt your credit score.
In order to circumvent these problems, work to resolve any disputes. (You can find more about getting errors off of your credit reports here.) You can also consider handling any issue you may have with a lender directly in lieu of filing a formal dispute with the credit bureaus. Here are some tips for negotiating with creditors.
4. Put More Money Down
Putting more money down to buy a home could put you in an entirely different mortgage category and help you bypass certain credit scoring problems.
Remember, if you have been told “no” by a bank or lender, you owe it to yourself to get a second or third opinion. What’s more, your credit score could improve from month to month, depending on what’s holding you back, so keep an eye on it in the meantime.