Credit scores and reports can be confusing to most people especially the first-time home buyers. When preparing to purchase a home, it is important that you first understand your credit score and how it affects your mortgage application. The Power Is Now and First Bank have partnered to bring you free homebuyers’ seminars. Very interactive and informative seminars meant to prepare you for the homebuyers’ journey. Find out more about our seminars here.
Regularly reviewing your credit report should be on top of your financial habits. A credit report reveals your financial background, helping you assess the personal payment history. your score is more than just a number, it determines a lot more than the loans you can get and the interest rates you will pay. Most insurance companies use credit scores to set premiums for auto and homeowner coverage. In addition, landlords use the credit score to determine who will stay in their homes. Therefore, if you didn’t take your credit score seriously, you better start doing it. credit scores are a financial tool; however, they can be a hammer or a lever, it depends on how good they reflect.
If you are thinking of buying a home now or in the next few years, the credit score will play a significant role, so I suggest you start working on them. According to a Federal Reserve Report, 90% of the U.S mortgages taken out in the first quarter of 2019 were by home buyers who had a credit score of at least 650 and 75% had a score higher than 700. The report further notes that only 10% of the mortgage borrowers had a credit score under 647. The median credit scores this year sits at 759. Here are the minimum credit score requirements for the conventional, FHA, VA and USDA mortgage program;
|Mortgage type||Credit score|
|FHA||500 (with 10% down payment)
580 (with 3.5% down payment)
|VA||No set minimum (entire loan profile reviewed instead)|
|USDA||580 (if eligible for a credit exception)
640 (for automatic approval)
The national average stands at 704. And any score falling between 700 and 749 is deemed as “good” while the scores falling between 650 and 700 are “Fair.” Scores that are 750 and above are excellent scores.
In most cases, the lenders will not issue you a mortgage if your credit score falls below the minimum threshold of the scores listed above. Most lenders work with a finite budget; therefore, it is very common for them to sell the loans they make t another company. They do not have unlimited funds to grant loans to every new applicant as they wait for 30 years for you to pay back your loan. To avoid this, most lenders will package their loans and sell them on the secondary mortgage market. Large companies such as the banks or the government-sponsored enterprises purchase these loans and resell them.
It is still possible to qualify for a home loan with a rate lower than the median, a higher credit score simply means better interest rates and loan options. Other factors can also influence the mortgage-approval process. This includes the cost of the home, the size of the down payment and your income.
there are so many factors that go into play when deciding on the mortgage affordability, it isn’t just about the credit score. Most of the lenders will want to see if you are able to afford your mortgage before they lend you money. Therefore, to minimize risk on their part, aside from looking into your credit history, they will also look at how much money you earn and how much money you spend. And not just the credit repayments but also the regular, fixed costs like childcare and other outgoings you have on a monthly basis.
Improving your credit score
The first step towards building and improving your credit score is to pay all your bills on time and in full. Your payment history makes up 35% of your FICO score. Most lenders will look if you have paid your bills on time for each account on your credit report. It is important to set your bills on auto-pay and keeping a tab on your payments to ensure that you make routine and on-time payments. By paying all your debts in time, is a good start, but what if you have reached the breaking point? FICO scoring considers your credit utilization ratio where it measures how much debt you have compared to the available credit limits. Here, the system looks at how much of your total available credit you have used, and as a precautionary measure, do not assume that you have to have a $0 balance on your accounts to score higher, nonetheless, less is better, but owing a little bit of debt can be so much better than owing nothing at all. Lenders will want to see if you borrow money if you are responsible and financially stable enough to pay the money back. The amount you owe could earn you up to 30%.
One other important factor that you have to consider and I emphasis on this is the length of the credit history. the credit score also takes into account how long you have been using credit. For how many years have you had obligations? How old is your oldest account and such like considerations? Long credit history will streamline the numbers and if not marred by late payments, it could really boost your credit score. That’s not to say that a short one is disqualified altogether, if you have been paying your debts on time and you don’t owe much, your credit score will improve.
If you have been following the news, you must be aware that patterns in credit have really changed dramatically over the last few years. But still, I think the credit system in the country is a flawed system. It takes much time to build your credit, and you have to work much harder to maintain that credit. Don’t get me wrong, credit scores are important but they would really be beneficial if they cut across every racial divide in this country. I believe the system has for a long time held hostage the minority groups in the country and that’s why you will find a very large gap in wealth creation between the whites and almost all other minority groups. I’m trying to think what happened to the people who were hit by the 2008 financial crisis? Most of these people are now homeless. That’s exactly what the system has done to most people. I think the credit reporting system in the country should be revised effectively, credit scores no matter how important they are, they should not be the deciding factor for a mortgage. Just because a person has a low credit doesn’t mean that they are financially irresponsible. Think about that.
The Power Is Now strives to bring you the latest developments in real estate economics, mortgage lending, and the market. We are committed to making sure that you are updated with what’s happening around you and to be your resource acquisitions and sells. We are partnered with great agents across the country and with First Bank to provide the products and programs that First Time Homebuyers need to buy a home or income property now because tomorrow it will be even more difficult. Go to www.applytobuynow.com and get started today. The Power to buy is now!
Eric Lawrence Frazier MBA
President and CEO of The Power Is Now Media Inc.
Adamczyk, Alicia. “This Is the Credit Score You Typically Need to Take out a Mortgage.” CNBC, CNBC, 15 July 2019
https://www.facebook.com/asklizweston. “Why Your Credit Score Is Important – NerdWallet.” NerdWallet, 14 Mar. 2019.
Leimgruber, Jesse. “10 Problems With Credit in The United States.” Medium, Bloom, 26 Sept. 2017.
Slater, Victoria. “ZING Blog by Quicken Loans.” ZING Blog by Quicken Loans, 2 July 2019, www.quickenloans.com/blog/do-you-know-your-credit-score-and-why-its-important. Accessed 17 July 2019.
“The 5 Biggest Factors That Affect Your Credit.” Investopedia, 2019.
“What Credit Score Do You Need For A Mortgage?” Experian.Co.Uk, 2019, www.experian.co.uk/consumer/mortgages/guides/credit-and-mortgages.html. Accessed 17 July 2019.
“What Credit Score Do You Need For A Mortgage? – MagnifyMoney.” MagnifyMoney, MagnifyMoney, 26 Mar. 2019.