Everything You Need to Know About Credit Scores

Posted on Wednesday, June 14, 2023

Understanding credit scores and their impact on buying a new home is essential for a successful home-buying journey. Credit scores affect how lenders see you and impact everything from your eligibility for a mortgage loan to the interest rate you’ll receive. Here’s what you need to know before purchasing your new home in Sierra Vista:

What is a Credit Score?

A credit score is a three-digit number that represents your creditworthiness and indicates how likely you are to repay your debts. Most lenders use your FICO score when deciding whether to offer you a loan. These scores are based on your credit history, including factors such as payment history, credit utilization, length of credit history, types of credit and new credit applications. The higher your score, the easier it can be to get a favorable loan.

What is Considered a ‘Good’ Score?

How high a score you need depends on your lender and the type of loan you are trying to secure. Some lenders are more flexible than others, but in general, you will need a FICO score in the 670 to 739 range. If you want to qualify for the best interest rates, you need a score starting at 740. However, government-backed loans, such as FHA loans, may accept lower credit scores, often starting at 500.

Can You Improve Your Credit Score?

As credit scores affect the terms of your loan, it’s well worth it to strengthen your score before shopping for a new home. Some steps you can take are paying your bills on time, lowering existing debt and not opening or closing credit accounts.

Why Pay Your Bills on Time?

Payment history makes up 35 percent of your credit score. Any time you miss a payment, your credit score will be affected. A late payment more than 30 days overdue can lower your credit score by as much as 100 points. A missed payment can affect your score for up to 18 months. It can take up to seven years for it to completely fall off your report.

Why Beef Up Your Credit History?

Lenders want to see a lengthy credit history. That way they know you are less likely to default. If your history is short or spotty, it’s time to extend it. If you rent, ask your landlord if they report your rental payment history to credit agencies. If not, you can sign up for PayYourRent, a service you use to pay your rent that will report on-time payments to all three major credit bureaus. Experian Boost can also add your rent to your credit history, as well as phone, utility and even streaming bills. Secured credit cards are a good way to build your credit history.

Why Lower Your Current Debt?

The more debt you are carrying, the more lenders will see you as a poor loan prospect. Carrying a large balance will increase something called your “credit utilization ratio.” This is the amount of credit you’re using compared to your total credit limit. Typically, your credit utilization ratio should be under 30 percent.

Why Order a Credit Report?

Order copies of your credit reports from the three big credit bureaus: Equifax, Experian and TransUnion. Not only will you see your current score, but you can also check for mistakes. If you notice an error, contact the credit bureau. You can usually file the dispute online. The agency is required by law to investigate and respond to your claim. Be sure to do this in advance of purchasing a home as any disputes can interfere with your lender approving your loan.

Talk To Your Sierra Vista Builder Today

Many builders have preferred lenders who can find ways to help you build or repair your credit. If your credit is already great, they may be able to help you secure more favorable terms. Once your financing is secured, you can pick one of their beautiful new homes.

The post Everything You Need to Know About Credit Scores appeared first on Sierra Vista.