Truth:  There are benefits to having a high credit score when it comes to buying a home, but there are great loan programs and options for people who have less than perfect credit. Plus, you can always work toward improving your score.

If you’re even thinking about buying a home in the coming year, now is the time to start giving your credit score the attention it deserves. It can be considered your “one ticket” to homeownership and getting a “good” mortgage, but you shouldn’t think of it as a roadblock if your score is lower than you’d like.

You can help bust this myth yourself if you start to understand:

• how your credit score is compiled and viewed by lenders,
• how programs and loans are out there to make homeownership possible for those of you with lower scores,
• how to improve (and not hurt!) your score starting today.

Credit Score 101

Lenders use your FICO credit score to determine how “risky” you are based on your past financial behavior. They want to make sure you can pay back your loan in full and on time.

Your score is based on information from your credit report, which is kind of like a “report card” on your financial behavior when dealing with credit. It can range from a high of 850 to a low of 300.

Your past payment history and total debt (how much you owe) weigh heavier in its calculation.  Your score also takes into consideration how long you’ve had credit, any new credit, and the types of credit. Remember, a credit score has nothing to do with your income or investments. It’s based on how you’ve handled your credit card payments and other loan payments, like your car or student loan.  It also takes into account if you’ve declared bankruptcy, have a tax lien, or you’re being sought by a collection agency. 

Loan Options and Credit Scores

Let’s look at credit score ranges and what impact they have on your loan options today.

740 and above. The higher your credit score, the more options you have – conventional loans, less down payment, lower interest rates – because you’re deemed credit worthy.  Lenders want to work with you and will offer the best mortgage products and terms, such as the lowest rates.  Your bonus is that you’ll save more money over the course of your loan because of its low rate.

720-739. You’re still considered a low risk and lenders want to work with you.

680 – 719. This score is stilled considered good, but your interest rate will be higher and you’ll be offered fewer loan options. With a higher rate, you’ll be paying thousands of dollars more over the life of the loan.

620-660. This is considered a fair score and lenders may work with you but may require more documentation to determine if they should take a risk and give you a loan. The process may take longer and require more patience on your part. Again, you’ll get a higher interest rate and less choice. You could apply for a FHA loan or VA loan, but this credit score is definitely doable.

Below 620. This is considered a poor score and many lenders will deny your loan application completely. You may have access to only one or two loan options, such as a FHA loan or a subprime adjustable rate mortgage (ARM). Some applications for FHA loans have been approved with a score of 580 or better. These borrowers will most likely have to put down more than the usual 3.5% and face a 10% down payment.

It’s Not Over Until It’s Over

For those of you with a lower score than you’d like, don’t give up! Shop around and meet with several lenders to see what loan options they are offering.

Many lenders will spend the time to fully understand why your credit score is low and take a more in-depth look into your entire financial background.  My team of lenders will even help you “rescore” your credit and help you with what exactly to do (and not do) to increase your score quickly.  Sometimes it can be as simple as paying a small debt off. 

Even though your credit score is weighed heavily when applying for a mortgage, it is only one piece of the qualification process. Other factors that lenders look at include your savings, total assets, current income, amount of debt, and any history with that particular lender.

Here are some options that could help round out your own credit-worthiness in a lender’s eyes:

• Prove a year of on-time rent payments to show you’ve been a responsible renter and can handle a mortgage payment.
• Explain it wasn’t irresponsible past actions but rather specific situations that caused your score to dip — such as losing a job in the recession or pandemic, large medical bills, or student loans.
• Have a good current debt-to-income ratio.
• Make a bigger down payment.
• Have at least 6 months of cash reserves in the bank.
• Get a co-signer who has a good or excellent credit score so that the bank knows it can get paid.
• Show you have other assets, such as stocks or bonds.

Keep in mind, that even if you get a loan with a higher rate than you would like, you can always refinance in two years once your credit has improved. You can then get a better rate. But remember to always weigh the cost of refinancing with the benefit of a new rate over the length of the loan.

Raise Your Score Quickly

Even simple actions can help improve (or damage) your score. It’s a step-by-step approach but start working on it today.

If buying a home is a goal of yours, then make a commitment to your credit score and focus on ways you can raise it and avoid ways to lower it. If you can raise your score from 620 to 700, you will save thousands of dollars in paying interest over the life of your loan.

Here are some strategies to keep in mind:

•Make payments on time … all the time. No matter if it’s a few dollars or thousands, a late payment will hurt your score. This makes up 35% of your FICO score.

•Ask for a higher credit limit on your cards but maintain a low balance.  The credit bureaus want to see that you have available credit you aren’t using. Keep your debt-to-credit ratio at 30% or better. This ratio makes up 30% of your entire credit score.

•Never make major purchases during the time of your loan process. You have total control over this! It looks like you are racking up new debt if you start making such purchases, and you don’t want to appear that you are a risky borrower to your lender.

•Think twice before canceling a long-standing credit card. A credit card that you’ve had a long time shows you’ve built a positive account record over the years.

• Negotiate with creditors to make a “good-will adjustment.” If you’ve been a good customer in the past with a credit card or loan payment and then had one or two late payments because of unemployment or other circumstances, such as the COVID pandemic, see if they will make this adjustment.

•Look out for errors or anything suspicious on your credit report. If you see anything that’s not right or questionable, contact the credit bureau to dispute this information. It’s important to monitor your report regularly especially if you plan to buy a home in the coming year. Remember that small discrepancies can lower your score!

•Pay off “trivial fines” such as parking tickets and even library fines.  You don’t want these to get turned over to a collections agency. Don’t let these small fees add up and hurt you. You want lenders to see that you are a responsible person and that they won’t have regrets lending money to you.

Let me know if you have any questions about your credit score. Again, my team of lenders are ready to help you get your credit score where it needs to be, if it’s not there already! Next week, my series will bust the myth that waiting to buy is better. Look out for Renting vs Buying – Your Break Even Point Is Sooner Than You Think.