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Credit is probably the single most important aspect considered in any type of loan and will have the most impact on you as a
borrower. With good or very good credit you get the best rates with the least amount of required documentation, including
loans that do not require any proof of income! Without it, your choices are limited.
There has always been a lot of mystery and bad information about how credit / credit reporting works. Without getting into a
long dissertation we’ll just cover the things that have the most effect on you as a home buyer.
Bearing in mind that most loans require a 3 bureau in file report, which includes a credit score from each bureau, it’s
important to note that the middle score is the one that the loan will be based on.
Credit scores
There are three score types, one from each of the three credit bureaus Experian / FICO score , Transunion / Empirica score
and Equifax / Beacon score
Almost every home loan is approved or declined based on the borrowers credit score. Credit scores can also influence the
interest rate you get.
The minimum score for a conventional loan is generally 620
While the best scores are in the 720 to 800 range, “A+” credit is based on a score of 720 or higher and generally any score
higher than that won’t improve things. This is especially important if someone is trying to get a loan without providing proof of
income.
A score of 680 is considered to be “A” credit and is the minimum for most loans that don’t require proof of income. A score
of 620 is usually the minimum requirement for a standard conventional loan.
Borrowers with scores below 600 are generally considered as higher risk borrowers and the rates and terms for loans tend to
be less attractive.
FHA and VA loans are the exceptions to credit score requirements, as FHA and VA do not require a minimum credit score.
They look at the actual credit history and will also consider additional documentation that might show that the credit report is
in error or an explanation from the borrower outlining unique circumstances that affected their credit.
You can have a low score or even no score and still be eligible for normal interest rates. Many banks and mortgage
companies will use credit scores even though it’s not a requirement, so it is important to ask if a lender has a minimum score
requirement for FHA and VA loans. If they do, you might want to look elsewhere.
What affects credit scores
There are several things that affect someone’s credit score, nearly all of it relates to the credit history. Here is a list of the
things that have the strongest negative impact;
Bankruptcy
Foreclosure
Judgments & Tax liens
Collections
Charge offs
Late payments on Mortgages during the last 24 months
Maxed out credit accounts
The things you can do to improve your scores are;
Making payments on time
Keeping credit card balances at 50% or less of their limits
Maintaining even a modest savings account.
Have erroneous items removed
All this means, that it is very important to know what’s on your credit and what your scores are.
Most all lenders require a credit report using 3 bureaus and the scores from each. The middle score is the one used to
approve or deny a loan.
If you are planning on buying a house in the next few months, the first thing to do is get a 3 bureau in-file report with scores.
This should not cost you more than $20.00 and can be obtained from either a credit reporting company or just about any
mortgage lender. Make sure you get a copy. This way if you want to shop around for the best loan, additional reports won’t
have to be pulled, which can affect your scores.
Please note that “free” internet credit reports do not provide the credit scores that are required and generally do not provide a
three bureau report. They usually give you some other internally generated score that has no relationship to the three scores I
mentioned earlier.
In addition, the “free” reports end up not being free, but in fact, most often you have signed up for a credit monitoring service
that costs anywhere from $50.00 to $120.00. and are of little real value.
There are other things that you can do to either maintain good credit or correct errors.
First, keep good records of payments and statements going back at least two years. This way if there is a dispute later you
will be prepared.
Remember to protect yourself when you make payment arrangements or pay off accounts and always get it in
writing!!