Credit scores are a huge part of the loan approval process. Credit score not only determines your eligibility for home financing but can also determine what rate you will qualify for. Why? Because your credit score is used to determine how risky of a borrower you are.
How Does a Lender Determine My Credit Score?
Lenders use your median score from the three national credit bureaus, TransUnion, Experian, and Equifax. This number is known as your FICO score and can range from 300 to 850. The lower your score, the higher risk borrower you are.
What’s the Minimum Credit Score for Loan Eligibility?
A minimum of 620 is required by all mortgage loans delivered to Fannie Mae, but individual establishments may have a higher credit score requirement depending on the loan type and program. Compass Mortgage now has the capability to finance FHA loans with credit scores as low as 580.
However, if your scores are below the minimums there is still hope for homeownership. There are several ways to improve your credit score including making on-time payments and keeping balances low on revolving credit lines.
What If I Don’t Have Any Credit?
No credit is not good credit, but certain loan types allow borrowers to use what is referred to as non-traditional credit. This allows borrowers to use accounts such as utility bills, phone bills, and rent payments in good standing as proof of credit history.
Talk to your mortgage banker about your options of using non-traditional credit toward your credit score.
What You Can Do to Get Your Credit Mortgage-Ready
Knowing and understanding your credit score are important components of managing your finances. Any time you apply for financing or a source of credit, your credit report is pulled. Be sure to ask the institution running your credit to give you a copy of your scores for your knowledge.
Before and after applying for a loan, make sure you pay all of your bills on time, don’t close any old credit accounts or open any new lines of credit, and keep balances low on revolving credit.
Of course credit score isn't the only factor in determining loan eligibility. Down payment, income, debt, and other factors are analyzed by your lender which is why getting pre-approved is essential before you begin to look at homes.
If you want to know where your credit falls in regards to home financing, contact one of our mortgage bankers. For more information on homebuying, refer to our Mortgage 101 Handbook, a go-to for anyone thinking of buying their first home.