Credit Scores and Home Buying: How Are They Related?
We are now offering FHA 203b loans to borrowers with FICO scores as low as 620! This means that if you meet the requirements you may purchase a “move-in ready” home using an FHA loan with a middle credit score of at least 620.
What are the requirements you may be asking? For starters, having a low debt ratio and two months of reserves in either your checking or savings account is a great place to start. These funds can not be a gift they must be liquid in one of your accounts. Beyond that it’s going to be about credit and how your credit report looks. That part is hard to say without looking at each individual situation but we are starting to see some relaxation in the credit guidelines.
To get the best FHA rate available your score does need to be a 660. Those obtaining “as seen on TV” types of loans and rates are those with FICO scores in the 700 range, relatively low debt ratio, those who show a pattern of savings and overall good repayment history. To reach this level it’s important to understand how credit is scored.
Credit is scored on five factors, listed below in order of importance. Points are awarded for each component.
- Payment History – 35% Impact: Paying debt on time and in full has the greatest positive impact on your credit score. Late payments, judgments and charge-offs all have a negative impact. Missing a high payment will have a more severe impact than missing a low payment, and delinquencies that have occurred in the last two years carry more weight than older items.
- Outstanding Credit Balances – 30% Impact: This factor marks the ratio between the outstanding balance and available credit. Ideally, the consumer should make an effort to keep balances as close to zero as possible, and definitely below 30% of the available credit limit when trying to purchase a home.
- Credit History – 15% Impact: This portion of the credit score indicates the length of time since a particular credit line was established. A seasoned borrower will always be stronger in this area.
- Type of Credit – 10% Impact: A mix of auto loans, credit cards and mortgages is more positive than a concentration of debt from credit cards only.
- Inquiries – 10% Impact: This percentage of the credit score quantifies the number of inquiries made on a consumer’s credit within a six-month period. Each hard inquiry can cost from two to 25 points on a credit score, but the maximum number of inquiries that will reduce the score is ten. In other words, 11 or more inquiries within a six-month period will have no further impact on the borrower’s credit score. Note that if you run a credit report yourself, it will have no affect on your score.
Having good credit has been and will continue to remain the key element being considered when purchasing a home. Paying debt on time and staying away from challenging situations such as bankruptcies and foreclosures will result in a much more pleasant home buying experience.
Please call me today to discuss your credit situation with regards to home buying.