Understanding your Credit Score when Buying a Home

Posted by BJ LaVelle on Wednesday, December 13th, 2017 at 11:38am.

To many first-time home buyers, credit score is something they know they need, but they don’t fully understand what it is or how it can impact their buying experience. If you’re a younger first-time home buyer, you may not even be aware that you already have a credit score built up.

One of the most common misconceptions we see when helping young individuals or families find homes is that they think that if they only just recently opened a credit card, then that’s all that will be reported on their credit score. When in reality, factors like student loans, applying for multiple credit cards or loans, or your car payments could all affect your credit score.

But let’s take a step back. Ask yourself, do you know what your credit score is at this very minute? If you don’t, you’ll want to check that out and verify there are no discrepancies. We usually recommend Credit Karma as an easy to use online service that will send you a monthly update and allow you to check your credit score at any time. The best part of Credit Karma is that it won't hurt your score to look. You can also get a full credit report from any of the major credit reporting agencies once per year.

Now that you have your credit score, what then?

Hopefully, your score was around what you were expecting! Keep in mind that your credit score can change. People with little to no credit to their name may see their credit score fluctuate by margins of 20-30 points every few months, while it will be harder for those who have an extensive credit history to positively impact their credit score in a short amount of time. The general thought is that you can make your credit score drop very quickly, but building it back up takes time.

So now that you know what your credit score is, it’s time to determine what that number means; check out what range your number falls in below.

What does that number mean for you?

Do you think you need an “Excellent” credit score to obtain a mortgage? That may not be true, in fact, over 50% of mortgage holders have a credit score between 600 and 749. Additionally, there are many state, local, and national home buying programs that can help people who have poor credit scores purchase a new home.

How does your credit score impact your mortgage?

Buyers with the highest credit scores are getting the best interest rates, which can have significant savings over the life of the loan. When contemplating a $200,000 mortgage, check out this example from The Simple Dollar. A borrower with excellent credit would save $67,000 over the length of the loan when compared to a borrower with fair credit. But it’s not impossible for those who have poor credit scores to negotiate a reasonable mortgage. You can use our mortgage calculator to try to find what mortgage configuration would work the best for you.

Tips for maintaining or increasing your credit score:

  • Chip away at high balances and pay down your debt as you can. Thirty percent of your overall credit score is based off of how much debt you are carrying. The recommendation is to keep revolving debt to no more than 10% of your available credit.

  • Set up a no-fail plan for making payments. If you can, set up automatic payments for all of your accounts to ensure you never have a late payment. Ideally, you should pay each credit card in-full monthly, but at least ensure you have plans in place for a minimum payment processed on time. Thirty-five percent of your credit score is based on how timely you are with payments.

  • Don’t close your oldest accounts. It may be counterintuitive, but the average length of credit is one of the factors for your overall score. If you have an older credit card that you no longer use, you are better off keeping the account then closing it. Just make sure that you use it and then pay off the balance a few times a year to prevent the card from being closed by the credit card provider.

When you are ready to buy real estate in Minneapolis, make sure to contact Roost. Our team would love to have the opportunity to go through the buying process with you and connect you with a loan officer that can help you obtain the mortgage that's right for you.

Happy Buying!

Leave a Comment