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How to Improve Your Credit Score to Buy a House

What credit score do you need to buy a home in 2018?

If you’re thinking about buying a house, you’re probably looking at your credit score and wondering what makes a good, better and best score, especially when it comes to being approved for a mortgage.


Your bank looks at many factors in your mortgage application. One of the most important is your credit score. In this article, we’ll explain credit scores in more detail and suggest ways to improve your credit score.


Credit Report and Credit Score: What’s the Difference?

One of the first things your bank will do when reviewing your mortgage application is request your credit report, which will include your credit score. Credit reports and credit scores are compiled by Equifax, Experian and TransUnion, which are the three major credit reporting bureaus in the country.


Your credit report is a detailed record of your credit history. It contains information about how much money you owe creditors and how timely you’ve been in paying bills. This includes not just credit card bills, but also your mortgage, utility bills and other forms of consumer debt.


The bank may obtain a credit report and credit score from one or all three of the credit reporting bureaus. The standard credit rating scale is between 300 and 850, with a higher score representing strong credit and a lower score representing weak credit.


What’s a Good Credit Score … and What Isn’t?

Below are the general ranges for credit scoring, according to Experian and CafeCredit:


  • 800-850: Generally considered to be an excellent credit score
  • 700-799: Generally considered good or very good
  • 600-699: Generally considered fair to poor
  • 300-599: Generally considered to be very poor

When reviewing mortgage applications, lenders have varying criteria for the minimum credit scores required to approve a loan. There are also different approval criteria for different kinds of mortgage loans.


Fannie Mae, a company that buys mortgages from financial institutions, publishes the “Eligibility Matrix,” which includes minimum credit scores for mortgages and home financing and refinancing. Your real estate professional or mortgage lender can help you understand the eligibility matrix as well as best practices for improving your credit score. For example, as of publication time, the minimum credit score for a fixed-rate mortgage is 620 and the minimum for an adjustable-rate mortgage is 640. According to the Veterans United Network, the minimum credit score required to obtain a VA mortgage is 620.


How to Improve Your Credit Score

Taking steps to improve your credit score before buying a house can go a long way toward a successful home-buying experience. Here are five suggestions to improve your credit score:


1. Monitor your financial ratios. There are two ratios that are especially critical for mortgage lenders: the debt-to-credit ratio and the debt-to-income ratio. The former is the percentage of credit available to you that you’re using, while the later is the percentage of your total income that you have in outstanding debt.


The lower these ratios are, the better your credit score will likely be. Most experts agree that you should use less than 30 percent of your available credit; and according to the Consumer Financial Protection Bureau, consumers should strive for a debt-to-income ratio of 43 percent or lower.


2. Pay all of your bills on time or early. Of all the factors that go into your credit score, this may be the most important. Zillow estimates that your payment history accounts for 31 percent of your overall credit score, and your level of debt accounts for 30 percent.


One way to make sure your bills are paid on time is to set up automatic payments using your bank’s online bill payment service for recurring payments like your mortgage and utility bills. This way, you don’t have to remember to mail these payments on time each month.


3. Diversify your credit. Having a healthy mix of different types of credit generally tends to boost credit scores. Conversely, having just one type of credit (such as credit cards) generally tends to lower credit scores. Therefore, over time, it may be wise to obtain several types of consumer credit, such as an auto loan, credit card and revolving line of credit.


4. Build a solid credit history. Some people think they should close old credit accounts before applying for a mortgage in order to get them off their credit report. However, most lenders want to see that you have managed your credit responsibly over a period of time.


So you generally shouldn’t be in a rush to close accounts once they’ve been paid in full, especially if you paid the accounts on time. This will help demonstrate responsible credit use on your part.


5. Don’t raise credit red flags before you apply for a mortgage. If you know you’ll be applying for a mortgage soon, avoid taking action that might raise concern or suspicion on the part of the lender. For example, you probably shouldn’t go out and make a big purchase on credit, like buying a new car, before applying for a mortgage.


Start Off on the Right Foot

For many people, buying a house is the biggest financial commitment they’ll ever make. You can get the process started off on the right foot by taking steps now to improve your credit score.


Did you know that Cadence Bank offers an affordable home loan program? It’s a great option for buyers in low to moderate income areas and/or with qualifying income limits. Learn more about the Cadence Affordable Home Loan Program.


If you'd like more information or have additional questions about getting your first mortgage, please contact us. You can also find a Cadence Bank mortgage professional near you.


This article is provided as a free service to you and is for general informational purposes only. Cadence Bank makes no representations or warranties as to the accuracy, completeness or timeliness of the content in the article. The article is not intended to provide legal, accounting or tax advice and should not be relied upon for such purposes.

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