If you need a loan to buy a home, one of the largest factors that will determine whether or not you qualify is your credit score. Your credit score is a reflection of how likely you are to repay debts and is calculated from your credit past.
If you need to work on your credit score in order to buy a home, it’s important to understand the main things used in calculating your score.
On time payments – this is the most important, even one missed payment can lower your credit score
Number and age of accounts – Ironically having more credit accounts can help your score (up to a certain point), and keeping them open longer gives the agencies more to base your score on. So if you are working on paying off credit cards, don’t be so quick to close the account once it is paid off, this could actually bring your score down! If you rent currently and don’t have a car payment, you might need more accounts to bring up your score, this is another reason you should speak with a lender if you have a goal of owning a home so they can give you a guide to how you can specifically raise your score.
Credit utilization – related to closing accounts, the total amount of credit you have available versus how much you have used of that credit is counted towards your score. Using under 20% of your credit or paying it off in full each month can result in higher scores.
Derogatory remarks – this can include bankruptcies, judgments, foreclosures, short sales and more. These can stay on your credit report for 7-10 years. If you have old ones you want to make sure they are removed when they should be in order to raise your score. Certain loan programs do offer home loans for those with bankruptcies and short sales after a certain period of time, typically 2-4 years right now.
Credit inquiries – this is when companies pull your credit report, the main ones that affect your score are car loans, credit cards, home loans, personal loans, school loans. This is important to remember once you are approved for a home loan, until you close on the home you do not want to apply for any other accounts as it may lower your score which is checked for final loan approval right before closing. We have seen buyers lose homes because they bought a new car or even furniture for the house on a new store credit card they opened!
So let’s discuss the actual credit scores you need in order to qualify for a loan right now. These are the most popular loan types and the minimum credit scores needed. Knowing this will help you make a plan and determine how long it will be until you can buy a home!
FHA – these loans have a 3.5% down payment, minimum credit score is 580, but if you have a lower score you still may qualify with a higher down payment
FHA Plus – these loans offer the 3.5% down payment as a second loan so you can buy with less cash, minimum score of 620 is needed, and you can get 5% total in the second loan if you have a score of 680 or higher
USDA rural loans – these offer 100% financing to houses in rural areas, minimum score of 640 is needed
VHDA down payment grant – this is a Virginia specific grant program that is available to people under certain incomes, they give you a down payment of 2-2.5% as a grant that doesn’t need to be repaid! Minimum score of 640 is required
VA loans, for veterans – there is actually no minimum credit score required! Banks may have their own minimums, but they can submit to the VA for applications under their minimum and get it cleared depending on circumstances.