90% of buyers either overestimate the minimum credit score required by lenders or are unaware of what they are looking for, according to Fannie Mae.
Take a moment to process that. This indicates that the majority of homebuyers—including you—believe they require better credit than they actually do. And even though it’s not always the case, that might lead you to believe that purchasing a home is currently out of your price range. Let’s examine what the data actually indicates regarding credit scores and home purchases.
There’s No One Magic Number
When purchasing a home, you are not required to have a certain credit score. Thus, more flexibility exists than most people think. Take a look at this graph, which displays the median credit scores of recent homebuyers across various loan categories:
Here’s what you need to understand. There is no one-size-fits-all threshold, and the numbers vary. And that might give you access to opportunities you previously believed were closed. Speaking with a reputable lender is the best way to find out more. According to FICO:
“Each lender has its own approach, including the amount of risk it deems acceptable, even though many use credit scores like FICO Scores to aid in their lending decisions. There are numerous other factors that lenders may consider, and no single “cutoff score” is utilized by all of them.
Why Your Score Still Matters
Lenders use your credit score to determine your financial reliability when you purchase a home. They want to know if you usually pay your bills on time, settle debts, and other things.
The kinds of loans you might be eligible for, their terms, and even your mortgage rate can all be influenced by your credit score. Additionally, your score may feel even more significant today because mortgage rates have a significant impact on how much house you can afford. According to Bankrate:
One of the most crucial elements that lenders take into account when you apply for a mortgage is your credit score. Not only to be eligible for the loan, but also for its terms: Generally speaking, the better terms and lower interest rates you’ll be eligible for, the higher your score.
Your credit doesn’t have to be flawless, though. You might still be eligible for a home loan even if your credit score isn’t as high as you’d like.
Want To Boost Your Score? Start Here
The Federal Reserve Board suggests the following wise actions if you speak with a lender and determine you wish to raise your score (and hopefully your loan type and terms as well):
- Pay Your Bills on Time: This one is significant. Lenders want to see that you can consistently make on-time bill payments. This covers everything, including bills for cell phones, utilities, and credit cards. Making regular, on-time payments demonstrates your responsibility as a borrower.
- Pay Down Your Debt: As far as your available credit amount is concerned, the less you use, the better. Try to keep this figure as low as you can. As a result, lenders view you as a less risky borrower and are more inclined to grant you a loan with better conditions.
- Review Your Credit Report: Obtain copies of your credit report and make any necessary corrections. Your score may increase as a result.
- Don’t Open New Accounts: It’s advisable to resist the temptation to apply for more credit cards in an attempt to raise your credit score. Hard inquiries on your report from too many new credit applications may momentarily lower your score.
Bottom Line
To be eligible for a home loan, your credit score does not need to be flawless. However, you may be able to negotiate better terms on your home loan with a higher score. Speaking with a reputable lender is the best way to find out where you stand and what your mortgage options are.