Your credit score is a determining factor of the amount you’ll be approved for when buying a house― or getting approved at all. Yet, understanding credit scores and how they work feels like a mystery to many people. While several factors determine credit, a little information about how a score is calculated and where to track it will give you the tools to improve. Then, with a bit of time and consistency, your credit will be right where you want it so that you can buy the house of your dreams.
What factors determine a credit score?
Before fixing your credit, it’s essential to understand the factors that create your score and how much they affect your score (not all factors are equally important). Let’s go over a few things.
Your payment history is the most impactful part of your credit score, accounting for about 35% of it. Any late payments will take a significant hit to your score. Prioritize making at least the minimum payment on time to any of your loans and credit cards.
Amount of Debt or Credit Utilization
Utilization percentages are calculated using the balance you carry versus the total amount available to you and it highly affects your score.
For example, let’s say you have three credit cards. Card A has an authorized balance of $1000, Card B allows $500, and the credit limit to Card C is $1500. That means your total available credit is $3000. If you carry a high balance of $2000 across your three cards, your utilization percentage will be high, negatively impacting your credit score. To improve your score, keep your “used” balance low compared to your available balance by paying down your cards.
An example of a derogatory mark is an account in collections. When a balance is unpaid, the company will eventually send the debt to collections. Therefore, it is crucial to settle accounts in collections as quickly as possible. If you have any accounts in collections, don’t panic― the mark will drop off with time. Sometimes accounts are sent to collections by mistake, without you knowing, or due to fraud.
Derogatory marks are another high-impact factor― that’s why it is essential to monitor your credit regularly.
Average age of credit history
Simply put, the longer your credit history, the better your credit. While this factor doesn’t impact your credit as much as the previous three, it certainly can give you a boost. Remember that this isn’t simply a measure from the time you got your first credit card. It’s an average of the age of each of your loan accounts.
If you opened your first card ten years ago and then opened a new card each year for the past three years, your average credit history will be significantly lower than ten years. In this case, your average history would be four years! Be aware of the number of credit cards you open. Even if you pay them off regularly, adding an account will lower your average credit history.
Variety of accounts
A variety of loan accounts positively impacts a credit score. Typically this means you should have a few revolving lines of credit (you pay off and reuse the limit), like credit cards and installment loans (you get the amount upfront and pay it off), like a car loan.
New Credit Inquiries
A credit inquiry is when someone pulls your credit score. There are two types of inquiries: hard and soft. Lenders use hard inquiries to qualify you for a credit card or loan, impacting your credit score. Therefore, you want to keep these to a minimum.
What scores qualify for a house?
You’ll have the most options available to you with a credit score of 760 or higher (these scores are considered excellent). But, there are several options for lower credit scores.
A conventional loan is the most common for home purchases and usually requires a minimum credit score of 620.
FHA stands for Federal Housing Administration. The government insures these loans to assist home buyers with low credit or low down payments. The minimum credit score varies based on down payment percentage but can be as low as 500.
A VA loan is designated to help military veterans buy a home. These loans are insured through the Department of Veteran Affairs, waive the down payment requirement, and don’t have a minimum credit score requirement (actual requirements will vary by lender).
The United States Department of Agriculture also offers an insured loan for low- to middle-income homebuyers. While there technically isn’t a required minimum credit score, expect to have at least a 640. A USDA loan has other requirements as well, including the type of land on the property.
How to clean up your credit to buy a house
If your credit score isn’t where you want it to be, or you don’t know what your credit score is, don’t worry! A credit score changes all of the time― your score is recoverable with a few good habits and some time.
Get a report
You can find your credit score and report in several ways.
You can request your credit report directly from reporting agencies, like Experian and Equifax (note: this will require a hard credit inquiry).
Apps like CreditKarma can give a score estimate with explanations to your score.
Finally, I recommend that you have a credit monitoring account to show you how to improve your score while protecting yourself from identity theft.
Make regular payments
As mentioned earlier, your payment history is the most critical factor to your credit score. Therefore, if you are paying off debt, make sure to pay at least the minimum balance on all of your accounts.
Pay off your debt
There are many debt payment strategies. Some recommend paying off the highest balance first; others say to start with the smallest accounts. Do some research and ask for help to make a payoff plan. No matter what, paying down your balances will increase your credit score.
Ask for a limit increase
It may seem counterintuitive to ask for a bigger credit card limit while you’re improving your credit score, but it is a good option in some cases. If your existing credit cards have low limits, it will be hard to use them and keep a low utilization balance. If your lender increases your limits, you can continue similar spending habits while taking up a lower percentage of your available balance. Of course, this only works as long as you don’t use up your new limit!
Consider a debt consolidation loan
There are cases where getting a debt consolidation loan is very helpful. In this instance, the loan will cover a few of your accounts. Then, instead of making four payments of different amounts to creditors with varying rates of interest, you’ll only have one creditor to pay with one interest rate.
Find programs to help
There are many books, programs, and agencies that can help you clean up your credit. My clients have had success with Anthony Davenport’s book, “Your Score.” Davenport details a user-friendly plan for the DIY credit repair person. Get a copy of “Your Score” on Amazon to start today!
Talk with Anita!
While you may not think of talking with a Realtor about improving your credit scores, Realtors work with people every day with a wide range of credit. Anita is a Realtor local to Sonoma County with 13 years of experience. She can offer suggestions on boosting your credit and give you an idea of what you could qualify for today. Give Anita a call!