Understanding Your Credit Score When Buying a Home

Your credit score plays a significant role in determining your financial qualifications when trying to buy a home. Lenders use this score to assess your suitability for a mortgage. A good credit score is an indication of good spending habits and shows a pattern of responsible borrowing established over a lifetime. The higher your credit score is, the more faith a lender has that a buyer will be able to repay a loan and should be considered low risk. Plus, a good credit score will also provide someone with the best mortgage rates, insurance, and other financial securities. Buying a home opens up a world of financial rules and requirements. In this blog, we take a closer look at what a credit score is, and how it is used to qualify buyers, and some tips for increasing your credit score.  

What is a Credit Score?

A credit score is a numerical summary of your credit history. Credit scores range from 300 to 850. A score of 300 is a poor score, and a score of 850 is an excellent score. Scores closer to 850 illustrate consistently good credit histories. This means on time payments, low credit use and long credit history. Lower scores indicate that a borrower may be a risky investment because of late payments or overextended use of credit.  

There is not an exact cutoff for a good or bad score, however, there are guidelines for each. Most lenders view scores above 720 as ideal and scores below 630 as a problem. It is important for consumers to be aware of their score so that they can work to improve their financial behavior in an effort to improve the score when necessary.

The information on a report includes personal information like name, birth date, and social security number.  Then it details credit card accounts such as revolving credit, such as credit cards and non-revolving credit, such as car loans. The report reflects any negative remarks such as liens, foreclosures, bankruptcies, and civil suits or judgements.  It also has a listing of who has inquired about the person’s credit history.  

How are Credit Scores Calculated?

Whether you are building your credit from scratch or rebuilding after your scores have gone down, it is important to understand how your scores are calculated. Credit scores are determined by computer algorithms called scoring models that analyze one of your credit reports from Experian, TransUnion, or Equifax. These are the three major credit bureaus. Although scoring models use different factors, or the same factors weighted differently, to determine a score, there are many general similarities.  

Most lenders use credit scores calculated by FICO and VantageScore® scoring models. FICO uses 5 components to determine your credit score. 

  1. Payment history is 35% of the score.  This looks at whether you pay on time and whether you pay the minimum balance.  
  2. 30% of the score is the amount owed.  Someone that uses less than 30% of the credit allowed, is considered a safe borrower and gets a positive rating.  
  3. The length of credit history makes up 15% of the score.  The longer an individual has an account, the better.
  4. 10% of the score is the mix or credit for an individual.   FICO prefers a mix of credit cards, mortgages, and auto loans.  
  5. The last 10% of the score is from new credit.  

What is a hard inquiry?

A mortgage inquiry will create a hard inquiry on a credit report.  It will be recorded by reporting agencies and usually causes a short decrease of a few points in a credit score. Mortgage applicants are only penalized for a single hard inquiry during a 45 period if choosing to check with multiple loan brokers. These hard inquiries usually stay on a credit report for 2 years, but it only affects an individual’s credit for one year.  

A pre-approval is a hard inquiry. Applying for a pre-approval through a mortgage lender is a standard step in the mortgage approval process because it involves lenders looking at more detailed information. Pre-approval from a lender is the only way to know your true price range for your home purchase and how much money you are qualified to borrow for your loan.  Realtors and Sellers will take buyers seriously with a letter. Plus, the mortgage process will be smoother and faster.  

What can you do to improve your credit score?

Pay your bills on time. This is the best way to influence your FICO and VantageScore. This is also a good indicator that you will handle future debts responsibly. The longer the history of paying on time, the better. Make sure you don’t miss a loan or credit card payment by more than 29 days. Payments that are at least 30 days late can be reported to the credit bureaus. A good way to ensure payments are on time is to set up automatic payments for the minimum amount due.  If you are having trouble affording a bill, be sure to reach out to the credit card company and discuss your hardship options. Late payments can stay on your credit report for up to 7.5 years.  

Lower your credit utilization. This is the portion of your available credit you use, expressed as a percentage. It is the total of balances on all your credit cards divided by the total of all your credit limits. (It’s also figured on a per-card basis.) This number is a big factor in your credit score — the less available credit you use, the better it is for your score. A recommended guideline is to use less than 30% of your limit on any card. So paying credit cards strategically is important. One way to do that is to pay down the balance before the billing cycle ends or to pay several times throughout the month to always keep your balance low.  

Leave your old accounts open. Once paying off student debt or an auto loan or a credit card, it is tempting to get rid of any trace of it and wipe it from your credit report. However, as long as your payments were timely and complete, these records can actually continue to help your credit score. Closing a credit card account can actually lower your credit score because you will have a lower maximum credit limit. So if you are still carrying balances on other loans or credit cards, your credit utilization ratio will go up. This would knock a few points off of your credit score. It makes more sense to keep the card with a zero balance.  

Become an authorized user on a credit card account with a high credit limit and a good history of on-time payments. When added as an authorized user, it gets added to your credit reports, so its credit limit can help your utilization. This is also sometimes called credit piggybacking and it allows you to benefit from the primary user’s (often a parent or relative) positive payment history. The account holder does not have to let the authorized user use the card or even provide the account number. For the best effect, make sure that the account reports to all three major credit bureaus. This is also especially helpful if someone has a thin credit file or very little established credit.  

Only apply for the credit you need. Every time someone applies for a new line of credit, a hard inquiry is pulled on their credit report. This inquiry lowers their credit score temporarily. So never apply just to see if you can be approved or just because you receive a pre-qualified offer of credit. The effects of a hard credit inquiry on your score can last for up to 12 months. So, be sure to only apply for the credit or loan that you need. It is also a good idea to refrain from applying for credit cards before taking out a large loan like a mortgage.  

Establishing good financial habits, paying balances on time, keeping low utilization rates, and applying only for credit that you need should work to improve your credit score over time.  

How do you check your credit report?

You can get a free copy of your credit report at annualcreditreport.com from each of the three reporting agencies, or you can call 1-877-322-8228. Be sure to check your credit report for errors that could be dragging down your score. Any mistakes can be removed by disputing them directly with the credit bureau. They are obligated to investigate any dispute and resolve it in a reasonable amount of time.  

What’s A Good Credit Score To Buy A House?

In most cases, you’ll need a credit score of at least 620 in order to secure a loan to buy a house. That’s the minimum credit score requirement most lenders have for a conventional loan. It is still possible to get a loan with a lower credit score, including a score in the 500s.

Can You Get A Home Loan With Bad Credit?

It is possible to qualify for a mortgage if your credit score is low. However, it is more difficult. A low credit score shows lenders that you may have a history of running up debt or missing your monthly payments. This makes you a riskier borrower. In order to offset this risk, financial institutions will charge borrowers that have poor credit a higher interest rate or require a larger deposit. 

At Boyle & Kahoe, our team of local experts is ready to guide you through the home-buying process. We are committed to fast, professional, and courteous service to help you understand and feel at ease throughout the home buying process. Our trained and licensed agents specialize in the Harford County area real estate market and are prepared to find the right home and get the best price.

Boyle and Kahoe Real Estate was founded in April 2019 by Jessica Boyle Tsottles and Robert Kahoe.The brokerage foundation is based on a strong passion for real estate and helping connect clients to the right properties. Jessica Boyle Tsottles is an experienced Realtor in Harford County, and Robert Kahoe is an experienced attorney focusing on real estate, estates and trusts. Together, the two are blending their vast knowledge bases together to start a brokerage that will be able to handle any real estate transaction. Both with local roots to Harford County for over 100 years, they are the area’s best experts! Check out their website at https://www.boyleandkahoe.com/ for more information.