10 November, 2022
Credit Scores – The Ins and Outs of Credit to Purchase a Home
A credit score is a number that rates a consumer’s creditworthiness. It is used by potential lenders to determine whether or not to give a borrower money. The higher the score, the better the borrower looks to potential lenders.
Credit scores range from 300 to 850, with 850 being the highest possible score. A high credit score means that a consumer has a good credit history and is likely to repay any loans they take out. On the other hand, a low credit score indicates that a consumer has a poor credit history and is less likely to repay their debts.
Scoring System
Credit scores are used by lenders, including banks and credit card companies, to evaluate the probability that an individual will repay a loan promptly. Insurance companies also use credit scores to determine rates for policies. Landlords may use credit scores when screening potential tenants. Employers may use them as part of the background check process. Most creditors use the average FICO Score range while setting their ranges for credit scores.
- Excellent: 800–850
- Very Good: 740–799
- Good: 670–739
- Fair: 580–669
- Poor: 300–579
How Credit Scores are calculated
Equifax, Experian, and TransUnion are the three leading credit reporting agencies in the U.S. They provide credit histories, update them, and store them. When calculating a credit score, five factors are considered regardless of differences between the three credit bureaus:
Payment history
Payment history is the most important factor, accounting for 35% of a consumer’s score. This includes on-time payments and derogatory marks such as late payments, collections, or bankruptcies.
Credit utilization
Credit utilization, which is the second most important factor at 30%, measures how much of a consumer’s available credit they are using. A lower utilization rate is better for a consumer’s score.
Length of credit history (15%)
Credit history counts for 15% of the credit score, and longer credit histories are considered less risky since they provide more information about payments.
Mix of credit types
Credit mix comprises 10% of a credit score and reveals whether someone has both installment and revolving credit, including auto loans and mortgages.
New credit inquiries
The new credit inquiries also count for 10%, as it determines how many new accounts and new ones have been applied for recently. It also includes when the most recent account was opened and how many new accounts the person has applied for.
Improving the Credit Score
There are a few things you can do to improve your credit score. One is to make sure that you always pay your bills on time. This includes both credit cards and loans. Lenders like to see a history of on-time payments, as it shows them that you are likely to repay any debt they give you. Another way to improve your credit score is to keep your balances low. This means using less than 30% of your available credit at any given time. This shows lenders that you are not relying too heavily on borrowing and that you can manage your finances responsibly. Finally, try to diversify your credit mix by having both revolving and non-revolving accounts. This demonstrates to lenders that you can handle different types of debt responsibly.
Credit Score Required for Mortgage
While having a high credit score (850) is always beneficial, it doesn’t automatically qualify you for a mortgage. Lenders have minimum credit score requirements that borrowers must meet to be considered for a loan.
- Conventional loans 620
- FHA loans 500 (with 10% down payment)
580 (with a 3.5% down payment)
- USDA loans 640
- VA loans 620
- Jumbo loans 700
Closing thoughts
Your credit score is one of the most important factors in getting a mortgage. It’s calculated based on your credit history, so it is essential to understand how it’s determined and what you can do to improve it. Our team of real estate agents at Midwest Farm & Land Co. is here to help you through every step of the mortgage process – from understanding your credit score to getting pre-approved for a loan. Contact us today to get started!
References:
https://www.bankrate.com/
https://mygreatlakes.org/
