When you’re just getting started adulting, you may not think it’s a big thing that you missed a credit card payment or were a few days late on your rent. But that casual attitude to financial obligations could come back to bite you when you start getting serious about buying a house.
Just as important as having a steady job with a good income, your credit score and your credit history play a big part in qualifying for a home loan. The sooner you understand the definition of a credit score and recognize the value of having strong credit, the better.
Building and maintaining healthy credit takes time and demands attention. But when you’re over with living with your parents, or you’ve realized you’re throwing money out the window by renting, you’ll be glad you put in the effort. Getting pre-approved for a mortgage is a lot less stressful when a lender sees that you’re paying off your car loan as planned and not abusing the credit you’ve already been trusted with. Plus, strong credit will also open more opportunities for you when it comes to getting more favorable terms on your mortgage and a sweet, low interest rate.
This blog will help you better understand the difference between a credit score and a credit report and why both are important. Your credit score rates how creditworthy you are by looking at your payment history and available credit and giving you a numerical value from 300-850. Your credit report takes a broader view and considers all your credit accounts to evaluate how reliable you are at repaying debt and how you’re doing at managing your credit.
What is a credit report?
A credit report is an account of all the loans you’ve ever had, your payment history and how much credit you have been approved for, even if you’re not currently using it. Because a credit report lays out your creditworthiness and the likelihood that you’ll repay your mortgage on time, lenders rely on it when deciding on whether to approve your loan application. Specifically, a credit report will include:
- All debts, past and present, including car loans, student loans and credit cards
- A history of how you’ve paid back the money you’ve borrowed (including missed and late payments)
- Any instance of being referred to a collection agency due to lack of payment, typically after multiple reminders and warnings
- Any tax liens or bankruptcies, which are generally available as public-record
- A listing of credit inquiries, and whether or not you were approved based on that inquiry
TIP: Before applying for a mortgage, we recommend looking through your credit report and attempting to correct any inaccuracies. Under federal law, you have a right to get a copy of your credit report free of charge every 12 months. Do it, especially if you think it might hold blemishes on it from your past.
What is a credit score?
Like a credit report, the credit score plays a huge part in a future homebuyer’s ability to secure a mortgage. Just by looking at your credit score, lenders make assumptions on how likely you will be to make your payments on time, every time. Scores can range from 300 – 850 points and take the following into account:
- Late payments lower your credit score; on-time payments strengthen your score. Accounts for 35% of your credit score.
- How much credit are you using compared with how much you have available? Even with credit cards with low limits, your credit score can drop if you’re maxing out your cards. Too much credit, even if you barely use it, can be seen as too much opportunity for you to get deeper into debt. Accounts for 30% of your credit score.
- The longer you have credit relationships, the better, but how you manage credit is just as important. Keep credit card balances low and pay them off on time. Accounts for 15% of your credit score.
- Try to vary the types of credit accounts you have open with a diverse mix of revolving credit, retail accounts, car financing, installment loans, and mortgages. Accounts for 10% of your credit score.
- If you apply for credit cards at every store you shop in or whenever you see a cashback offer, your credit score could drop. Remember, every inquiry affects your score even if you don’t get approved. Accounts for 10% of your credit score.
TIP: Avoid applying for new credit before looking for a home loan as it will increase your debt-to-income ratio, aka DTI. That’s the difference between your overall debt and your income. Postpone large purchases (like a new car or vacation) that you would put on credit. Limit spending altogether (you want to save up for your down payment, right?) or pay in cash when possible.
Regularly check your credit
Your credit rating can have a massive impact on so many aspects of your life — the ability to lease a car, rent an apartment, buy a house, even get a job in some cases — you don’t want it to include errors that can bring your score down. checking your credit report every year results in two important things:
- It allows you to correct any errors with the credit bureaus before you apply for a loan.
- It makes you aware of negative information within your report that a potential lender may ask about.
As you develop a longer credit history, your credit score and your credit report will change, so it makes a lot of sense to check on it regularly and pay attention to your credit obligations.
You can get your annual free credit report from each of the three major reporting agencies (Equifax, Transunion and Experian) by clicking over to www.annualcreditreport.com or by calling (877) 322-8228. No need to contact the credit reporting companies individually as they supply the same information to the Federal Trade Commission.
What is a good credit score?
Google “what is a good credit score?” and the results are all over the map. Some will say that a score of 600 is average, others say you have to be at 700 to be considered ‘good.’ The truth is that a good score is the one that gets you the home you want on the terms that make sense.
Borrowers will find that they have more options available with a higher credit score. This could include better loan terms, lower interest rate, lower mortgage payments and quicker turnaround on pre-approvals.
The good news is that you don’t need a perfect credit score to get a home loan. Depending on your situation, there are a variety of home financing options available.
Movement Mortgage offers many popular loan types, especially for first-time homebuyers. Here are the credit scores you should aim for to have a smooth application process.
- Federal Housing Administration Loans: Applicants for FHA loans at Movement must have a credit score of 580 or higher.
- Veterans Affairs Loans: In most cases, Movement will look for a credit score of at least 580 for VA Loans for active military families and veterans.
- United States Department of Agriculture Loans: At Movement, applicants looking to buy a home in a rural area can apply for a USDA Loan as long as they have a minimum credit score of 580.
- Conventional Purchase Loans: These loans can be used on nearly all property types, but because they have stricter credit requirements than government-backed loans, Movement asks that Conventional Loan applicants have a credit score of 620 or higher.
Speak with a local loan officer or apply online
Are you a prospective homebuyer with a question about your credit score? Reach out to one of our local loan officers to discuss which mortgage would be best for you or get tips on credit repair options.
Or, if you’re ready to get started now, you can always apply online!