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Buying a home? This is what your credit score should look like

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Credit scores provide some measure for how you have been dealing with your finances, but in no way does it signify your success. As in exceptional grade points, averages don’t automatically represent the highest form of achievement. They each show just one aspect of our day-to-day lives.

As for credit scores, these only become of great significance once you decide to apply for a credit card, get a car, or buy a house.

If you aim to qualify for a mortgage, this is just one of those few instances in life when you will want to brush up on your score. On the off chance, you do check your credit to find that it was not what you were hoping for, don’t sweat it. Remember, when there’s a will, there’s away.

In this article, we’re going to advise you on the minimum FICO score needed to buy a home. We will also offer a few tips on how to improve your credit score so you can grab the type of loan you prefer within 2 to 6 months.

Home Buying Credit Score

Traditional mortgages, otherwise known as conventional loans, ask for a minimum credit score of 620. This is the bare minimum if you are borrowing from a private lender. However, you might find more lenders out there who may ask for 670 or higher. This is because, on the FICO Score scale, good credit starts at 670. Any score south of this number is considered as bad credit.

However, there’s another option you can consider in the form of government-backed loans.

Only one mortgage insured by the government asks for specific credit score requirements. This is the Federal Housing Administration (FHA) loan. The minimum credit score needed to qualify for this mortgage loan is 500.

The other types of mortgages insured by the federal government do not specify any credit score because they either exist to promote the use of rural land (in the case of USDA loans) or provide a job benefit for service members and veterans (in the case of VA loans). However, as in any other type of application, it will depend on the lender who looks over your profile to be granted a home loan. Mortgage lenders can prescribe their credit requirements.

Which minimum credit score should I prepare?

The choice is then yours to decide which FICO rating you will want to satisfy once you apply for a mortgage. For example, will you need a conventional loan, or will you go for a government-backed mortgage?

If you decide to get a traditional loan, it is preferable also to have at least 20% of the money needed already tucked away in your savings. Although you can close on a conventional loan with just a 3% down payment, should you aim for 20 percent, you will be charged a lot less over the life of your loan.

A credit score of 500 is considered achievable. The majority of American consumers already have this minimum credit score. So chances are, you are already eligible for at least a few home loans in the market.

Credit scores below 500 can be few and far between. If you are one of these rare people, you may have already defaulted on a previous loan, or you don’t have enough data in your credit report with which to generate a higher score. On the other hand, maybe you’ve only started working, or you’ve just received your first-ever credit card.

Credit Score Boost

As you can tell by now, you won’t know whether you can snag that loan amount until you’ve spoken to a lender. After that, you can do your due diligence and get as many reviews from prosperous mortgage borrowers. But even if you hope for the best and settle for a 620 credit score, a lender can still turn you away and quash your hopes due to their overlays.

You also have to keep in mind that you take points off your score with every application you submit.

Ten percent of your FICO Score is composed of new credit. This category comprises your most unique lines of credit and the latest applications you have forwarded for loans.

In the worst-case scenario, you’ve barely met the credit score needed for a specific type of mortgage. Then, because of one refusal by a lender, you already become ineligible altogether. This is a situation you want to avoid. Our advice? Aim for a credit score that will make you a shoo-in for the loan you want with enough room for unforeseen mishaps.

Increase your credit within two months

If you monitor your credit score via Credit Karma or other online tools, you’ll notice that it can look different every month. This is because it updates as often as your credit institutions submit data on your most recent credit history.

If you want to get your score a lot higher, you have to prepare yourself with the possibility that you will need at least eight weeks to see changes.

Tips

  1. Thirty-five percent of your FICO Score is all about your payment history. The more recent a late payment is, the greater this can hurt your score. So, in the immediate few months, before you buy a house, you want to make sure that you pay your bills on time and in full. Unfortunately, as far back as seven years, late payments can still negatively impact your score as they are required by law to stay on your report. As far as your credit is concerned, late fees are only those that are at least 30 days late. So there’s no need to worry if you made a mistake paying a bill recently. However, if you have actual late payments in your file, the more work you have to put in to increase your FICO.
  2. It can also be quite inconvenient, but it does happen that people find wrong information in their credit reports. It can be as minor as a misspelled name or false address. However, if the error is a detail that pulls down your credit, you have no other choice but to dispute it. The good news is, as long as it can be proven that it is incorrect, this data can be stricken off your report. Unfortunately, once you file a dispute, it can take as long as 30 to 50 days before you see an update on your credit score.

Increase your credit within six months

Credit scores show a pattern of behavior.

Just in case you are reading this article because you are planning to buy a house in 2022 or further down the road, there are even more things you can start doing now so you can plant the seeds of a higher credit score.

Tips

  1. Any kind of debt that you don’t need is wrong for you. But in the six months before you purchase a new home, debt can become your friend. By this, we mean that it wouldn’t hurt if you took on an additional loan. This can come in the form of another credit card, but we highly advise that you limit it to just one new line of extra credit. As we mentioned, unused credit can take points off your score. It can also be a warning for lenders if they see that you’ve opened a whole lot of new accounts within a short period. A new card can also significantly help your score after six months if you keep it active and always pay on time.
  2. If you used to make it a habit to avoid charging purchases on your credit cards, this is the time to ensure that you put those cards to good use. First, get your calculator out, determine how much your credit limits are set together, and then get the amount representing 30% of this total. Then, every month, make sure that you are not spending more than this 30 percent because credit utilization also affects how your FICO is computed. Note that, at this time, you should only be living well within your means, and it will also greatly help your wallet to only charge transactions if you already have the money to pay for it.
  3. Finally, the best pro-tip we can recommend is to find someone with an exceptional FICO Score willing to sponsor you. For FICO, outstanding scores start at 800. So if someone can trust you enough to add you as an authorized user on their credit card, their positive data will start showing up on your credit report and pull up your score. This is a convenient hack that is 100% legitimate, so it almost feels wrong to skip it once you’re already eyeing this goal.

 

The key thing to understand about these tips is they will only affect your credit score gradually. However, the effort to be patient will be worth it. In six months, you’ll be able to reap the rewards of your hard work in the form of dollar savings on your home loan! So go for it because we’ll be rooting for you!

 

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