Two Factors To Consider When Purchasing a Home
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Simplify Home Loans UT
Published on January 28, 2022

Two Factors To Consider When Purchasing a Home

Two factors usually hold people up from purchasing a home.  The first is the amount of money required to purchase the home (down payment, earnest money, deposits, closing costs) and the second is their credit score.  What is a credit score?  Why does a credit score matter?  How can I check my credit score? How can I improve my credit score?  If you have any questions before reading through or need some help fixing your credit, let one of our loan officers know so we can get you in touch with the right people to get your credit right and get you into a home! 

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What is a credit score?

Your credit score is a 3 digit number (ranging from 0-850) that companies use to determine the likelihood that you will be able to pay back a loan/credit card or other lending accounts.  There are 3 credit bureaus (Experian, Equifax, and Transunion) that use a mathematical formula to determine your score.

How is my credit score determined?

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Your individual creditors (Chase Bank, Citi, Discover, etc)  send information to the 3 credit bureaus mentioned above.  Each company then uses its mathematical formula to determine your credit score.  You will see things on there like mortgages, credit cards, student loans, personal loans, and any other credit inquiries you may have.  

Because each company receives a little different information, each bureau will have a different score for you.  This could be because one credit card reports to 1 or 2 bureaus and not the 3rd.  The models companies use to determine your score vary as well.  The two main models or mathematical formulas you see are: 

  • FICO score
  • Vantage Score

Where can I see my current credit score?

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You are entitled to one free credit report each year from each bureau. You can go here to claim that free report once a year. Of course, those who want to stay up to date on their credit reports and see what their scores are doing more often have a few different options.  

  • Check with your bank/credit union to see if they have a free program to check your score.
  • A lot of credit card companies also offer free monthly score updates.  
  • You can use free resources like Credit Karma or Credit Sesame.
  • You can also check with the bureaus themselves ExperianEquifax, and Transunion.
  • There are many other resources you can use as well, but make sure to do research on them before giving out your social security number.

What is going to affect my credit score?

When you look at your credit score, you’ll notice several different categories and it will say whether they have a high impact or low impact on your score.  Let’s look at some of those sections:

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Payment History- High Impact 

When a creditor looks at your credit report, they want to make sure you pay your debts monthly with at least the minimum payment. Your payment history accounts for about 35% of your credit score. It represents the consistency in which you pay off debt and make on-time payments. This section also includes delinquent accounts and items like bankruptcies, judgments, and liens. Poor payment history can have a significant and negative impact on your overall credit score.

 Credit Utilization- High Impact

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The easiest way to determine your Credit Utilization Rate is to add up how much of your credit you are using and divide it by the total amount of credit available.  So, say I have $30,000 in total credit, and I’m using $15,000 of my credit. My credit usage rate would be $15,000 (credit being used) / $30,000 (total amount of credit) = 50% (credit utilization). In order to have the highest grade with your credit utilization, you want to make sure that you stay below 30% of your total credit being used.  

Credit Age- Low Impact

Your credit age is the average of all of the ages of your accounts.  You want to have a credit age of 5+ years to reach the highest grade for your credit scores. For this reason, you’ll hear those who give credit advice say that you should never close your first line of credit or credit card because it helps with the age of your credit.  

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Account Mix- Low Impact

Account mix or credit diversity is another factor that impacts your credit score. You want a mixture of credit types because it shows lenders that you can successfully manage different types of debt. Establishing a mix of credit types (credit cards, mortgages, personal loans, etc.) will help to raise your score slightly.  

Credit Inquiries- Low Impact

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In other words, how many times has a company pulled your credit?  Note on this that if you have the same type of inquiry in a 30 day period, it will only count as 1 inquiry.  For example, if you’re trying to get a mortgage loan and you have 5 companies pull your credit for a mortgage loan you’ll only have 1 inquiry.  Credit bureaus recommend keeping your inquiries between 0 and 2 in a 12 month period.  

Do I have good credit?

Many consider 700 to be a good score while most know that 850 is a perfect score. There are many factors when getting a mortgage besides just your credit score, but let’s look at a base score for each loan type. Be aware with each of these that this is the base score established; each individual lender may have additional overlays for credit score requirements.  

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VA Loan Requirements

If you’re a veteran or active-duty service member, you could qualify for a VA loan. The VA has established a minimum credit requirement score of 580, however, check with the lender to make sure what their guidelines are.

FHA Loan Requirements

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FHA loans which are backed by the Federal Housing Administration (FHA), require a minimum credit score of at least 580.

Conventional Loan Requirements

Conventional loans are the go-to loan for most borrowers. They offer great interest rates and low-down-payment options. You’ll want a minimum credit score of 620 or above for this type of loan.

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USDA Loan Requirements

USDA loans are only for homes in eligible areas, as determined by the U.S. Department of Agriculture. To get a USDA loan, you’ll need a minimum credit score of 640

In Conclusion

The better your credit score the better the terms and options will be for your mortgage. Your payment history, credit utilization, credit age, and credit mix are all important elements that affect your credit score. The credit score you’ll need for a mortgage depends on the type of loan you’re applying for, you can look above for the minimum requirements. If you are ready to get the process started, reach out so we can help you today! 

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