Everything you need to know about home buying
Congratulations! You’re getting ready to buy your own home — that’s kind of a big deal. Whether you’re a first time home buyer or are buying a second home somewhere, there are a few things you should know about how your credit score impacts the home buying experience.
Keep reading so your favorite Credit Wizard can break down what credit score is needed to buy a house and other tips for buying a house so that you get the very best deal.
What is a Good Credit Score to Buy a House?
Honestly, it all depends on what type of mortgage loan you’re applying for. And yes, there are different kinds of homeowner loans, here’s a breakdown:
#1. Conventional Loan
A conventional loan isn’t insured by any government agency like the other loans listed here. Conventional loans follow the standards set by Fannie Mae and Freddie Mac, aka the big banks. Fannie Mae and Freddie Mac are shareholder-owned companies that operate under a Congressional charter. Their job is to help ensure a reliable and affordable supply of mortgage funds throughout the country.
Conventional loans are typically given to people with good or excellent credit scores. They also usually have an interest rate that doesn’t suck and flexible payment terms like 15 or 30 year mortgage terms.
You’re going to need a credit score of 620 or higher when applying for this loan in order to actually take advantage of those perks we mentioned.
If your score is lower than 620 though, don’t worry. There are other loans available to you. You can still qualify for a mortgage.
#2. FHA Loan
One of those other loans is an FHA Loan. FHA stands for Federal Housing Authority and this is one of those loans that’s insured by a government agency.
FHA Loans are great if you don’t have the best credit score or don’t have a ton of money saved for your down payment.
You’re going to want to have a credit score of 580 or higher when applying for this loan. But can get approved with a credit score as low as 500, you’ll just pay 10% interest, instead of 3.5% interest with a score of 580+.
#3. VA Loan
If you’re a veteran, qualified service member, or spouse of a veteran/qualified service member, then you’re likely eligible for a VA Loan, which you guessed it, is also backed by a government agency.
There’s no mandated minimum credit score when you apply for a VA Loan, but keep in mind that your mortgage lender might have a minimum credit score of their own since the loans are distributed through private lenders even though the VA guarantees a portion of the loan.
#4. USDA Loan
If you want to live that cottagecore or off the grid life in a qualified rural or suburban area and have an income that’s below 115% of the area's median income, you might want to consider applying for a USDA Loan.
You can get away with a minimum credit score of 620 when you apply for a USDA loan, but most lenders will want your score to be at least 640.
Just so it’s clear. Here are the ideal credit scores to have when you’re applying for a mortgage loan:
Tips for Buying a House
Now that you’ve got a 101 in homeowner loans, here are some tips to make things happen!
Build Your Credit
If your credit score is low and takes you out of the running for any of these loans or will make you have a high interest rate, there are a few things you can do to raise it.
#1. Pay Down or Off Debt
The people who are reviewing your mortgage loan application are looking at your credit history and want to make sure you can handle their monthly payment, in addition to everyone else you owe a monthly payment.
So, if you pay down some debt whether it's your credit cards or paying off your car, taking care of your debt demonstrates to lenders that you can be trusted with their money because you’ll pay them back.
Paying down or off debt also means that you can handle taking on the financial responsibility of home ownership. Plus, your credit score is going to go up. It’s a win-win.
#2. Have a Strong Payment History
Your payment history is one of the most important factors when it comes to determining your credit score. It also really helps when you’re trying to build your credit. So, pay your debts back on time and build a long, and strong payment history. Your credit score will be on the rise in no time.
#3. Don’t Try and Get More Credit
Don’t go out and get a loan for a new car when you’re also applying for a mortgage loan. Too many applications for credit at once is a surefire sign to lenders that you’re living beyond your means. It also is going to lower your credit score and that’s the opposite of what we’re trying to do here.
#4 Use Rising Tides
We're a company that can make homebuying much easier. On average Rising Tides Clients have a 3x higher chance to get approved for a home loan. We can make old mistakes a thing of the past, including bankruptcy, collections, late payments, and more.
Watch Your Debt-to-Income Ratio
Less debt makes you less risky to a lender which signals to them that you’ll be able to pay them back, which is really all they care about. And your debt-to-income ratio or DTI helps them determine how risky you are. Your DTI is the percentage of your gross monthly income that goes toward paying off debt.
Great, how do I figure that out? Not to worry. To figure out your DTI, divide the total of your recurring debt (car payments, credit card, etc.) by your monthly income.
Here’s an example: If your debt is $1000 a month and your monthly income is $5000, then your DTI is $1000/$5000 = 0.20 or 20%.
You want to keep your DTI below 50% because the lower your DTI, the better interest or in this case mortgage rate you’re going to get.
Keep Your Loan-to-Value Ratio in Mind
All of these ratios are things lenders use to decide if they’re going to let you borrow money. The Loan-to-Value ratio, or LTV is no different. Your LTV is your loan amount divided by the home purchase price. And you want to have a lower LTV to get a lower interest rate and save thousands, thousands, on your mortgage.
Let us explain.
So if your mortgage loan is worth $150,000 and you buy a home for $170,000, your LTV is 88%. This of course decreases as you pay off your mortgage loan. Higher LTV’s are riskier for your lender because it means that all your eggs are in one basket—your loan is paying for most of your home.
How to decrease your LTV? Put down a larger down payment. Using the same example, if you get a mortgage loan of $120,000 instead of $150,000 because you put down $50,000 ($30,000 more than before) then your LTV is now 70%. You’ve got more skin in the game, so you’re less risky to lend money to. So you’ll get a lower interest rate on your mortgage and save thousands on your house over time!
Every lender allows a different LTV percentage, but you want to keep your ratio at 80% or less. If it’s higher, you might have to get private mortgage insurance and who wants to do that?!
Keep a Steady Check Coming In
You’re probably going to be asked to show proof of your income and assets. Two years worth of proof. So, whether you own your own business or work for someone else’s, make sure you keep a check coming in regularly. Your interest rate will thank you.
Always keep an eye on your credit score.
A Rising Tides representative can pull your FICO 8 scores free of charge for you. Be sure to know what your scores are through the homebuying process because they will check routinley. This also affects your insurance rates too, so never hurts to stay on top of it.
Get Packing!
Again, congratulations on buying a home! It’s a big adulting step that can be hard to navigate on your own. We hope you feel a bit less confused now and can’t wait to be invited to your housewarming.
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