Keeping track of your personal credit score is particularly important before applying for a loan, such as a mortgage. It determines whether your application will be approved, and how much you will pay in the long run. So, how many points does a prospective homeowner need, and how can you boost your score if it is low? This guide will answer all of your questions.
Why Scores Matter
This number of points assigned by FICO or VantageScore is a universal metric for lenders and other organizations. Whenever a business needs to check your creditworthiness, it will likely turn to this indicator. It is a universally accepted summary of your credit past.
Both systems rely on a scale from 300 to 850 and use similar requirements to assess your ability to repay the debt on time. This mix of factors includes your prior payments, how much you owe in total, how many different credit products you have used, the length of your borrowing experience, and new accounts.
Lenders regard this indicator as a shortcut, a reflection of your creditworthiness. Every mortgage provider is interested in applicants who are financially stable, as they are likely to meet their obligations. A poor score raises suspicion. If you do get approved, the interest rate will be higher, as the lender will charge more to hedge their risks. Thus, borrowing with a high score is cheaper. You can save thousands of dollars in interest over the life of the loan.
So, What Is the Lowest Acceptable Score?
On average, you need at least 760 points to unlock the best interest rates on mortgages. The threshold depends on the lender and type of mortgage. Loans insured by the government have the lowest requirements. Here is the breakdown:
- Conventional loan — 620
- Jumbo loan — 680
- FHA loan — 500 (with 10% down) or 580 (with 3.5% down)
- VA loan — 620 (on average)
- USDA loan — 640
How to Find Your Score and History
To find your current status, you may use My FICO or personal finance apps like Credit Sesame. Decide how many points separate you from the goal based on the lender’s requirements. Then, find out if the score is actually fair to see if you need the services of credit improvement companies. Mistakes are more common than you may think – on average, a third of Americans have one or more mistakes in their credit reports, which leads to skewed assessments because on average, corrections take between 3 and 6 months.
Visit www.annualcreditreport.com to download files from three official sources — Equifax, Experian, and TransUnion. Every bureau compiles data based on the information shared by your creditors. Each of the histories is unique, and each may be flawed.
How to Check the Report
After downloading the files, examine them carefully to pinpoint any inconsistencies. If you see an account that does not belong to you, wrong amounts, or other suspicious data, these items may be disputed formally through a standard procedure.
There are two ways to go about it — by hiring a credit repair consultant or doing everything on your own. Neither is an overnight process, and the duration depends on the number of inconsistencies. Professional assistance lets consumers achieve their goals more quickly, as credit lawyers are proficient at identifying disputable information and collecting evidence.
If the Score Is Right
There is no legal way to raise a score that is based on correct report data. However, you can mitigate the effect of negative events by generating positive history. This process is known as rebuilding. Here are some of the things you could do:
- Work With Your Balance/Limit Ratio
This proportion is known as credit utilization, and it is calculated across all credit cards you have. For example, if you have three cards with a total limit of $10,000, and the sum of balances is $1,500, this means you have utilized half of your available credit. Meanwhile, experts recommend staying within the 0% – 10% range.
To achieve the goal, you may work with either element of the proportion or both. Reduce your balances as much as possible, secure more available credit through a limit extension or by getting a new card. If you become an authorized user on someone else’s account, their limit will also work in your favor.
- Always Pay on Time
Nothing is more damaging to your credit history than late payments. Avoid missing the due date at all costs. Set automatic reminders or program scheduled transfers to avoid falling behind.
- Add More Information
When there are just a few points separating you from approval, Experian Boost may come in handy. This online service lets you incorporate additional payments into the report. For example, your Netflix or HBO subscription and phone bills may help you gain as many as 12 points.
Neither repair nor rebuilding bring immediate results. Creditors communicate with bureaus based on their reporting cycle — between 30 and 45 days. Thus, the changes in your debt to credit ratio may be reflected in a month.
If the score is biased and you need repair, budget for delegated fixing carefully. Most of these companies charge clients on a recurring basis as long as their services are used. Every dispute letter triggers an investigation that lasts for 30 or 45 days. Then, each of the bureaus involved provides a formal response and sends you a copy of your report if the changes have been accepted.
To Sum up
Prospective homeowners need at least 500 or 680 points in the FICO system to qualify for a mortgage. The requirements depend on the type of loan and insurance. Consumers should check their scores in advance to ensure eligibility.
If your current result is too low, you may raise it through repair or rebuilding, depending on the accuracy of the reports it is based on. Professional services will save you time and effort, but you may still need between three and six months to remedy the score.