IN order to purchase a home, good credit can go a long way.
However, hope isn’t lost for those with not-so-great credit or those still building theirs.
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Typically, all folks looking to buy a home go through a similar process including getting a loan.
This means meeting with banks, credit unions, or online lenders who will inevitably check your credit score.
This is calculated by credit reports with factors including bill-paying history, any current unpaid debt, the number and type of loans you have, any debt sent to collection, foreclosures, bankruptcies, and more.
In another installment of our series, Let’s Get Real, The U.S. Sun spoke with the executive editor at Realtor.com Judy Dutton to shed some light on credit scores.
A LITTLE MORE CREDIT
Judy told The U.S. Sun that a credit score “essentially functions as a grade representing your track record paying off debts.”
A credit score may also be called a FICO score – named after its creator Fair Isaac Corporation.
“The number is calculated from your credit report, which is a full record of every credit card, college loan, car loan, or any other loan you’ve ever been responsible for,” Judy said.
A good credit score is important when buying a house because most lenders will only loan money to those with a proven track record of paying off past debts.
Typically, credit scores range from 300 to 850, with an “excellent” score being anything from 750 to 850.
A good credit score ranges from 700 to 749, a fair score is 650 to 699, and a score below 650 is considered poor.
While the minimum credit score required for a mortgage varies, typically the lowest number you want is 620.
This is because conventional loans have a minimum credit score, so having a score lower than that will prove difficult.
1. FIND THE RIGHT LOAN
While a low credit score does is not ideal, you can still qualify for loans.
Government-backed loans are a good place to start as they tend to be slightly more lenient with their credit score requirements.
For example, Federal Housing Administration loans are great for first-time buyers and those with lower scores as down payments can get as low as 3.5 percent.
Plus, buyers may be able to qualify for a U.S. Department of Agriculture loan at just 3.25 percent.
Just keep in mind that borrowers must meet certain requirements to be eligible for loans and may require a minimum credit score, maximum debt-to-income ratio, and proof of employment.
2. WATCH OUT FOR INTEREST RATES
Researching the right loan for you is a great tip for all, especially for those with lower credit scores.
Just note that those with low credit scores may only qualify for a “subprime” loan.
Judy said this is where you’ll have to pay a higher interest rate on any money borrowed than borrowers with good credit.
“You might also have to pay mortgage insurance, which is an added fee lenders tack on to mitigate the risk that you might default on your loan. “
3. CHECK YOUR SCORE
These subprime mortgages will likely cost a homebuyer thousands of dollars more over the life of the loan which is why checking your credit score and report before you start shopping for a home is imperative.
You can check your credit score and report for free on sites like Creditkarma.com.
INCREASING YOUR GRADE
While it may take time, improving your credit score can be done and it all starts with knowing how it’s tabulated.
Judy broke down the score like this, 35 percent of scores depend on making payments on time.
Another 30 percent comes from your debt-to-credit utilization, or how much debt you’ve accrued compared to your full credit limit.
Length of credit history accounts for another 15 percent, which is why having no credit cards at all is actually bad for your score.
“But by far the most effective tactics for boosting your credit score are to always pay all monthly bills on time, and to pay off as much of that debt as possible so you’re carrying a low or no balance month to month,” Judy added.
Just remember that changes don’t happen overnight.
Once you’ve implemented the credit-boosting tactics, raising your score may take months.
That’s why it’s important to start building your credit when you’re young, making sure all payments are made on time.
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