The Truth About Credit When Buying a Home

Jennifer Hernandez • November 9, 2022

When buying a home, one of the most important things to have is a good credit score. Which is why knowing the truth about credit can be helpful!

Everyone wants to have the highest score possible! What do homebuyers in Texas need to know? What can a local Houston loan officer tell you? This is your guide!

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Excellent Credit Improves Your Mortgage Rate

The first thing that you should know is that having an excellent credit score , usually defined as 740-850, can get you a better mortgage rate. This is because a credit score reflects the probability of how likely you are to pay your mortgage on time.

Credit scores takes into account things such as current loans, credit card utilization, inquiries, late payments, collections, and public records filed such as bankruptcies or judgements.

For example, let's say that you are right around the national average and have about a 700 credit score. A lender may look at you as a moderate risk and give you a rate of x. However, if you were to have a credit score of 800, you could be considered less of a risk and get a lower mortgage of .25% -.375% less than x .

While the difference between the two mortgage rates might not seem very significant, over time it can be. Which is why it is important to make sure you have a solid credit score. When you compound this interest savings over a 30 year loan, this can save you tens of thousands of dollars in interest payments!

If your score is not in the excellent category, don't be discouraged! There are many programs to offer borrowers that find themselves good or average credit.

Does Applying For A Loan Affect My Credit?

Did you know that all mortgage inquiries within a 30 day period count as just one inquiry as far as points are concerned? Furthermore, your score will not be affected for 45 days. In summary, applying for a mortgage loan should not affect your credit much. However, if you have other factors happening at the same time, like delinquencies or excessive credit card utilization, that is where point drops can come into play.

Most buyers are not affected negatively when applying for a home loan, even with multiple lenders inquiring into their credit, as long as within the timelines mentioned above.

Different Scores for Different Loans

According to www.myfico.com, there are over 25 different formulas for credit scoring. We’ve found this website to be most reliable and accurate when it comes to credit education and scoring when it relates to mortgage financing.

Something else to consider is that there are different types of mortgage products, the most common being FHA and Conventional loans. They each have their own credit score requirements.

Conventional Loans require at least a 620 credit score, as long as putting 20 percent down payment. If you put less than 20 percent down, the score requirement increases to 680.

FHA loans have a lower credit score requirement than other types of loans. The minimum score that FHA will allow is 550, but many lenders will override and require a minimum of 600. There is also a catch to the lower credit scores below 600, , the qualification requirements are more stringent. Reserves could be required, verification of one year of rental history, and possibly a higher down payment.

VA loans are specifically available for military veterans. VA loans do not have a minimum credit score. However, the lending community , and each lender specifically , will set the minimum standard for VA loans. Most lenders are 580 or higher.

Credit Card Utilization

For your revolving balance credit , such as credit cards, the recommended utilization balance is 30% or less. In many instances, even if a person pays their card balance in full monthly, at any given point in the month, a balance will appear. This is because the credit card companies report balances only once a month, when the statement is released. This will be the amount that reports to the three credit bureaus, Experian, Equifax and Trans Union.

If you are preparing to purchase a home in the next six months, I recommend you begin making sure that your statement balance at the monthly close date, is 30% or less than the high available credit. This will ensure the best credit score possible when the lender is presenting offers available to you.

For some additional tips about credit, you can check out our video on Credit Secrets You'll Never Find On The Internet.

The Final Truth About Credit

While having an excellent credit score assures the best rate, there are programs for all levels of borrowers. We speak to clients every day who are eager to purchase the home of their dreams. Knowing where you stand about with credit is the most important task to address first with a lender. Obtain a referral from a trusted source, and allow a lender to pull your credit and counsel you if needed on what to keep, start and stop doing so that the moment of homeownership is even closer!

Are you looking for a mortgage loan in the Houston and surrounding areas? We would be honored to advise you further. Start here today!

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