Introduction
So you’re thinking about buying a house, eh? Congrats! That’s a huge decision and one we know you didn’t make lightly. If you’ve done any research at all, which you most definitely have, you know that you’ll likely need a certain credit score to buy a house. This is where home buying can get really tricky.
When you’re getting ready to check the best credit score to buy a house against what your credit score actually is, it won’t help if you don’t have some knowledge under your belt first. Learn all about credit scores, what they mean, and how you can increase yours right here!
Already know what you’re looking for? Jump right to it with the links below!
- What Is a Credit Score?
- How To Increase Credit Score Quickly
- What’s a Good Credit Score To Buy a House
- How To Check My Credit Score (For Free)
What Is a Credit Score?
Before you get ready to analyze your credit score to buy a house, it might be helpful for you to understand exactly what a credit score is. Well, you probably know what a credit score is in general. But how is it calculated? What counts and what doesn’t count towards your credit score? What’s the highest – and lowest – score possible? All these elements factor into your complete knowledge of the credit score, and they’re important to understand before you try to make changes to your finances to alter your credit score.
Your credit score, on a surface level, is a prediction of how likely you are to be able to consistently pay back a loan in the allotted amount of time. A mathematical formula is used to look at your financial history and calculate a scoring model that represents the odds of your repayment. A higher score means your odds are greater, whereas a lower score means your odds of repayment may not be that great.
What Goes Into a Credit Score?
There are a ton of factors that make up your credit score. Just some things that go into your credit score calculations are
- Any unpaid debt you currently have
- Your history of paying your bills on time (or not)
- How long you’ve had open loans
- How many loans you have
- How large your current or former loans are/were
- New credit applications
- How much of your currently-available credit you’re actually using (a.k.a. utilization)
- If you’ve ever had a debt sent to collections (i.e., you didn’t pay it on time)
- If you’ve had any foreclosures or bankruptcies in the past
If you’re currently paying a car loan, student loans, or credit card debt, you’re building your credit. If you fail to pay them, you’re hurting your credit.
Different Types of Credit Scores
Just when you thought you were starting to understand the credit score, you look at yours and see two or three different calculations. What?!
Let us explain!
You never have just one “credit score.” The two most common credit score models are FICO and VantageScore, which are calculated and viewed differently. Your scores may also vary depending on which of the three major credit bureaus have calculated it: Experian, TransUnion, or Equifax. However, the score between the three bureaus usually won’t be considerably different.
FICO
FICO was developed in 1956 by the Fair Isaac Corporation. This model is used in the vast majority of credit decisions. The scoring ranges from 300 to 850. Here’s how FICO looks at your score.
- 300-579 = Poor Credit
- 580-669 = Fair Credit
- 670-739 = Good Credit
- 740-799 = Very Good Credit
- 800-850 = Exceptional Credit
FICO calculates your score with strict percentages in five different categories.
- Payment history = 35%
- Current debts owed = 30%
- Length of credit history = 15%
- New credit (how frequently you apply for new credit) = 10%
- Credit mix (how you handle different types of credit) = 10%
VantageScore
VantageScore was recently created in 2006 by Equifax, TransUnion, and Experian in an attempt to update the credit system and create new competition for the FICO. As such, they’re slightly more lenient on their scoring system, which generally looks like the following.
- 300-499 = Very Poor Credit
- 500-600 = Poor Credit
- 601-660 = Fair Credit
- 661-780 = Good Credit
- 781-850 = Excellent Credit
Their leniency extends to their calculations, which don’t follow strict percentages. Instead, they determine your score by placing a level of influentialness on each category. The most influential areas have the highest impact on your credit.
- Total credit use, current balance, and current available credit = Extremely Influential
- Credit mix (how you handle different types of credit) = Highly Influential
- Payment history = Moderately Influential
- Length of credit history = Less Influential
- New credit (how frequently you apply for new credit) = Less influential
What Is the Highest Possible Credit Score?
850 is the highest basic credit score for both FICO and VantageScore. Usually, anything above 800 is considered “perfect” credit.
Lowest Credit Score Possible
You can have no credit score before you start paying on loans or other lines of credit. However, once you’ve started paying, the lowest basic credit score you can have is 300. So if you’ve seen a 300 on your credit score and asked yourself, “Is my credit score bad?” we hate to be the bearers of bad news, but yes. 300 is, indeed, a bad credit score.
More like this: Buying a House With Bad Credit: What Are My Options?
How To Increase Credit Score Quickly
You’re not going to increase your credit score overnight, so you can go ahead and forget about that. However, there are some ways you can increase your credit score relatively quickly.
Just knowing how to raise your credit score is half the battle. If you’re careful with your finances and are confident you can handle payments and installations in a timely manner, you may find that raising your credit score isn’t too tough of a task.
The following are some great options to look into if you want to know how to boost your credit score.
1. Don’t Let Credit Report Errors Slide
If you’ve ever seen a tiny credit report error and decided to just forget about it, we’d advise against it. Every single point counts towards building your credit, and an error could result in a decrease. Keep a close, watchful eye on your credit score reporting and reach out about any errors you see, no matter how tiny.
You should be on the lookout for misspellings of your name, incorrect card numbers, incorrect addresses, and similar errors.
To report an error, you should include all the information you think is wrong, the correct information, and proof of the error and send it to your credit reporting agency.
2. Get a Secured Credit Card
Since you’re researching how to increase your credit score to buy a house, you’ve probably been told to get a credit card. But don’t get just any card!
A secured credit card isn’t the same as an average one (that’s unsecured). So then, what is a secured credit card? Well, it’s a type of credit card that is backed up by a cash security deposit from you, the cardholder. You’ll usually then get a line of credit starting at about $200. If you can make your payments on time, you’ll sometimes get a refund for the cash deposit and see an increase in your credit score over time, if only a small one.
The important thing here is that you don’t miss any payments and that you pay back the money in full. Otherwise, it will have the opposite effect you’re looking for.
3. Pay Off Your Debts
This may seem like an obvious one, but its importance cannot be overstated. An estimated 80% of Americans are currently in debt for one thing or another. If you’re even remotely like the majority of us, you probably owe somebody something. Whether that’s a car payment, student loans, or credit card debt, it’s important to get those paid off as soon as possible.
You’ll see a great improvement in your credit score when you’re able to pay off loans quicker. So make a household budget and stick to the essentials until you’re ready to pay off your current debts and boost that credit score!
4. Ask for a Credit Limit Increase
This may seem a bit strange, but let us explain. By asking for a credit limit increase, you’re going to be lowering your utilization. But what does THAT mean?
Remember when we mentioned how credit scores take into account how much of your current available credit you’re using? THAT is your utilization. And the higher that is, the higher the likelihood that it may damage or at least have no positive effect on your credit.
By asking for a credit limit increase every six to nine months, you’re decreasing your total amount of utilization, which will reflect positively on your credit.
WARNING: If a credit bureau asks to make a hard inquiry into your credit after you request an increase, decline the offer. A hard inquiry will decrease your score.
What’s a Good Credit Score To Buy a House?
Now you’re probably asking yourself, “What credit do I need to buy a house?” It’s always a safe bet to make sure your credit score is somewhere around 620 if you’re getting ready to buy a house. That doesn’t mean you can’t buy a home with a lower credit score. But you may get worse rates and terms if you attempt to do so.
Here is the generally accepted minimum credit score to buy a house for different home loan types.
- Conventional loans usually require a 620 or higher.
- An FHA loan with a 3.5% down payment usually only asks for at least a 580.
- An FHA loan with a 10% down payment will usually require a 500 (though some lenders require up to a 580).
- Many VA loan lenders will also require a 580, but this can vary widely.
580 can be a pretty safe credit score needed for mortgage payments, but you may want to consider boosting your credit score to at least 620 before getting serious about buying a home and starting to make payments.
More like this: How To Buy a House: An In-Depth Guide for Soon-To-Be Homeowners
How To Check My Credit Score (For Free)
Don’t know how to check your credit score? It’s actually pretty easy! We know you’ve probably heard all horror stories about people trying to check their credit and ending up with a ding against them because they didn’t know what a hard inquiry was and how it would impact them. If you use the following programs, you can check your credit score for free online with no negative impact on your credit.
1. Credit Karma
You’ve heard the commercials all your life, and we can tell you first-hand that Credit Karma is the real deal. They’ll show you several different reported credit scores and can even help you keep tabs on your loans.
2. AnnualCreditReport.com
You’re allowed to get one yearly free credit report from each of the three major credit bureaus via AnnualCreditReport.com.
3. Credit Sesame
Credit Sesame pulls your score from TransUnion and offers free credit monitoring services.
These three tools will help you easily and safely monitor your credit as you try to increase your credit score to buy a house.
Read this blog for after you move in: What Makes a House a Home? 11 Tips for After Moving in (2022 Edition)
Conclusion
Now you’re ready to buy a house! Well… not quite. You still have a ways to go and a lot more research to do before you sign your final offer letter. Lucky for you, AHRN is by your side every step of the way – starting with understanding how to increase your credit score to buy a house.
With AHRN, you can search for houses in your budget, connect with a military realtor, and find tons of resources on home loans and more!