A person's credit score can have a big impact on their ability to buy a home. Understanding credit and how it affects the home buying process can help a person who wants to buy a home. If you're thinking about buying a new construction home or a pre-owned home soon, here's what you need to know about your credit score.
What Is Your Credit Score?
A credit score is a score that falls between 300 and 850. This score is a measure of a person's bill payment history and relative ability to pay bills. Bills paid on time make the credit score go up, while bills paid late can make a credit score go down. There are other factors that affect credit score, as well. These factors include:
- Credit inquiries. A credit inquiry is a credit check made by a potential lender who is trying to decide whether to loan someone money.
- Age of credit history. People build a good credit score with time, so people who have a relatively new credit history may not have a score that is as good as someone with an old credit score.
- Debt. Too much debt can reduce a person's credit score, especially if the debt piles up quickly.
- Closed accounts. Closed credit card accounts and other accounts may have a negative affect on a person's credit score.
- Bankruptcy. Bankruptcy stays on a person's credit history for years, and can have an impact on the person's credit history for years after it occurs.
- Collections. Collections efforts can also stay on a person's credit history for many years, and will have a negative impact on their credit history during that time.
A good credit score will generally fall in the range of 700 to 800, while excellent credit is usually anything above 800. Fair credit typically falls between 600 and 700, and a poor credit is a score is usually below 600.
Home buyers with good credit generally have little trouble getting a loan. Borrowers who have fair to poor credit may be limited in the type of loan they're able to get.
How Does Credit Score Affect the Home Buying Process?
A person's credit score is one of the many things that a mortgage lender will take into account when trying to decide how much money to loan to a potential home buyer. Other factors the lender will take into consideration include the person's income, assets and other loans.
When a potential home buyer gets pre-approved for a mortgage, the lender checks the buyer's credit score. Once the buyer is ready to take out the loan, the lender will check the buyer's credit score again. If the credit score has gone down significantly since the buyer's pre-approval, the lender may deny the loan application.
For this reason, many lenders tell home buyers not to make any major purchases in the weeks before escrow closes on a home. Buying a car, large furniture set or getting a loan for some other reason could have an impact on the buyer's credit score.
How Can You Find Out Your Credit Score?
There are many services online that allow consumers to check their credit score. Some of these services are free for consumers because they're paid for by advertising fees. Many banks and credit card companies will provide a free credit score to consumers who login to their online account. Some credit card companies will even print the consumer's credit score on the bill.
Some financial counselors who work for non-profit groups will provide free information about a person's credit score. In addition to providing free information about the score, many counselors will also provide information about how the score can be improved and what the score means.
How Can You Improve Your Credit Score?
There are many things that home buyers can do to improve their credit score. Paying bills on time is critical. People who regularly forget to pay their bills can avoid this problem by setting reminders in their calendar and by setting up autopayment in their accounts.
Aside from paying bills on time, reducing debt is another way that people can improve their credit score. Paying down debt slowly brings up a person's credit score month by month.
Where Can You Find Out More Information About Getting a Mortgage?
If you're an Overland Park new home buyer who would like to get a loan to purchase a home, talk to a mortgage lender. Your lender can tell you more about what you need to do to improve your credit score and get a mortgage.