Tuesday, March 29, 2022 / by Joe Johnson
Your high school math classes?probably taught?“pi” and the quadratic equation. (Do you use those?today? Neither do we!) Instead, we should have focused on a more important number: your credit score.?
Credit is an important component of the mortgage loan qualification process. Your score represents your ability to manage debt and helps determine your interest rate. The lower your interest rate, the lower your monthly payments will be.
You actually have?three credit scores, established by the three major credit bureaus: Equifax, TransUnion, and Experian. Using a system called , each bureau examines your debt history and assigns you a number from 300 (very low) to 850 (exceptional).?To learn more about these scores, visit our Knowledge Center article, Building Your Credit 101.
Each bureau scores you a little differently, but the minimum range you need for most loan programs is between 580 and 640. Let’s take a closer look at credit scores and their requirements.
Originally Fair, Isaac and Company, FICO®?is a data analytics company based in San Jose, Calif., founded by Bill Fair and Earl Isaac in 1956. The “FICO®?score” is a leading measure of consumer credit risk, and the one primarily used by mortgage lenders.
How You Are Scored?
Credit bureaus evaluate your credit based on five factors:
Payment history: 35%?
Outstanding balances: 30%
Length of time you’ve had accounts: 15%
Types of credit (student loans, car, etc.): 10%
Number of credit inquiries from other companies: 10%?
By far, the most important step you can take in maintaining good credit is to make your payments on time. Late payments can lower your credit score, and serious delinquencies, like collections, can remain on your credit report for seven years. Learn more about delinquencies and how they affect your credit in our Knowledge Center article, How Delinquencies Can Affect Your Credit Report.
Loan Program Credit Score Requirements
Most loans fall into one of the following four categories. Government loans have certain agency guidelines to which lenders must adhere, but ultimately, the lender determines the minimum score they will accept.
Conventional loans are generally?for?borrowers with stronger credit, solid?income,?and savings for a down payment. The lender alone sets the credit requirements. Atlantic Bay’s minimum credit score requirement is 620.
Federal Housing Administration (FHA) loans are federally insured mortgages for borrowers with lower credit scores and income. If you know your credit scores need work, these loans might be a good option for you. The FHA’s minimum credit score requirement is 580; Atlantic Bay requires 600.?
U.S. Department of Agriculture (USDA) loans are government-backed mortgages for lower-income homebuyers in areas meeting certain population requirements?(Fun fact: You don’t have to be a farmer!)?The USDA does not have a fixed credit score requirement, but 580 is considered the absolute minimum. Most lenders require a 640 for USDA loans. Atlantic Bay, however, only requires 620.
U.S. Department of Veterans Affairs (VA) loans?are government-backed mortgages for military veterans, service members, and surviving spouses. The VA does not have a minimum credit score requirement, but again, you will want at least 580. Atlantic Bay’s?minimum is 600.
What If I Have Bad Credit?
First, call your lender. At Atlantic Bay, our Mortgage Bankers are happy to do a “” on your credit (in which your credit scores will not be affected) and look at ways to pay down accounts and resolve delinquencies.?You may have other options, such as opening a secured credit card, or becoming an authorized user for a loved one with solid credit.?We’ll help you find out!?
A "soft pull” is a review of your credit that is not tied to any lending decisions. For example, an apartment complex, insurance company, or even you yourself can do a soft pull merely to examine your credit. Soft pulls do not affect your credit score in any way.
You should also monitor your credit report to achieve the highest credit score possible and stay safe from identity theft.?You have one from each credit bureau, and you are entitled to a free credit report from each of them every year. You can obtain them by visiting AnnualCreditReport.com.
Errors on credit reports are quite common, and they can lower your credit score. Be on the watch for:?
Accounts reported late when you paid on time?
Outdated negative information—most derogatory marks must be removed after seven years
An ex-partner mistakenly listed on a loan or credit card
Incorrect account numbers or accounts that aren’t yours
Inaccurate credit limits or loan balances
Accounts you don't recognize
Addresses where you've never lived
The good news is you can dispute and remove errors by contacting the creditors and the credit bureaus.
In some cases, you might want to enlist the help of a credit repair company. You can find a reputable agency on the Department of Justice's list of credit counseling agencies. Remember that rebuilding will take time, maybe years. And despite all those “free credit repair” ads, reputable companies will charge?fees, ranging?roughly from?$20 to $130 per month. On the bright side, many companies offer discounts for veterans, couples, and seniors, as well as?money-back guarantees.?
Credit Karma vs. FICO®
Finally, our Mortgage Bankers are often asked, “Why is my credit score with you different than Credit Karma?” Services like Credit Karma tend to give you different scores than those provided by FICO®. That’s because Credit Karma uses a different scoring model—VantageScore. However, most mortgage lenders, including Atlantic Bay, use FICO®, so that’s the one you need to watch.
If your credit isn’t where you want it to be, don’t despair. With time and patience, there are ways forward, and the Atlantic Bay team is ready to help you!
Ready to buy your new home? The Reiner Realty Team can help! Give us a call today at 540-494-9284 or click HERE for more info.