When deciding to buy a real estate property you must first decide whether to pay cash or to get a mortgage loan. If you do not have the cash or a rich relative to pay for a property then a mortgage loan is your next option.Your credit score and income are the two most important aspects to consider when deciding to borrow money to purchase a property. Your credit score helps a lender determine their risk in loaning you money. Your score combined with your income determines the amount and at what rate a lender will loan you money. The higher your score the more likely you are to qualify for a loan and the better the terms will be. By understanding the different aspects that go into deciding your credit score you can have more control over what that number is. FICO is a company that compiles credit data from credit reporting agencies and is commonly used by lenders.
There are five main factors that go into your FICO scores, and they each have a different effect on your score. Here’s the breakdown:
Payment history (35% of the FICO score)
Debt/amounts owed (30%)
Age of credit history (15%)
New credit/inquiries (10%)
Mix of accounts/types of credit (10%)
Equifax, Experian®, and TransUnion® are the three major credit reporting agencies that lending institutions will use to determine your credit worthiness.You can receive a free copy of each once a year by going to annualcreditreport.com. This will not give you your score but will allow you to review all 3 of your reports and should be used to check for any errors. You can check and monitor your credit scores at Creditkarma.com. While not exactly the same as a lender may see,it will give you a good idea as to where you stand and will not lower your credit scores by using. It is free to use and will also give you tips on how you might improve your current score. Following are some guidelines for minimum requirements for different types of loans. These requirements can vary but the main thing to remember is the higher your score the easier your ability to borrow money.The minimum FHA credit score for a home loan is 500, however, it’s possible to get a mortgage loan with no credit score at all. Lenders can check “non-traditional” credit sources and build a credit report if you don’t have enough accounts to generate a score.
VA home loans require no minimum credit score, FHA minimums range from 500 to 580, USDA loans have a FICO floor of 640, and conforming loans require a minimum credit score of 620. Exceptions can be made to minimum credit score policies for borrowers with reasonable cause.
In review, taking the opportunity to review your credit and fix any errors before starting the loan process with a lender with save you lots of time and heartache.