One key item to consider when financing a home purchase is your credit score. Your credit score determines what loans and interest rates you qualify for. It informs lenders whether your regular repayments will be reliable. Unless you are planning to pay cash for a house, you will need a loan, and therefore will need a decent credit score. Here is what credit score is needed to buy a house in Ohio.
Lenders determine how much home you can afford based largely on your credit score, or you and your spouse’s combined scores.
What is a Credit Score?
Your credit score is a numeric score based upon the information contained in your credit report. This credit report contains information on your financial transactions, such as credit cards, loans, and payment histories for taxes, utilities, and sometimes even rent, as well as other information including your pursuit of new credit. This information goes back for 7-10 years or more. It allows financial institutions to quickly and objectively evaluate whether you are a good credit risk based on how you handle your past and existing debt.
Payment History – This is about 35% of your score, the most important area of all. Have you made payments on time consistently? Are there any bankruptcies, liens, or other signs that you’re a risky borrower?
Amounts Owed – This is about 30% of your score, the second most important area. How much do you owe in total? Are your balances at or near the limit? Has there been a change in your spending habits recently? How much new credit do you seek? What is your debt-to-income ratio?
Length of Credit History – This counts for about 15% of your score. How long have you had credit? How long have you had a good credit score? Bear in mind, being an authorized user on someone else’s credit, even if you paid the bill, is NOT establishing a credit history. This begins with your own first credit card, apartment, or loan.
Credit Mixture – This counts for about 10% of your score. If you have only high interest accounts or loans, if you don’t have any credit at all, this can count against you. Higher scoring mixtures include a sample of credit cards, loans, and other types of credit. Financial institutions want to know you can handle multiple payments, and that you’re responsible with all your financial obligations.
Inquiries – This counts for about 10% of your credit score. Have you been seeking a lot of new debt lately? If you have, it’s a red flag, and a lower score, as it may indicate you’re taking on too much, too fast. If you DO need to shop around for a credit card or a mortgage, do it quickly. Typically you will not be penalized if there’s a short period of time that your credit is being checked. For example, eight mortgage inquiries made in any 14 day period will count as one inquiry.
Scores range from 300 to 900; as a measuring stick, 720 is considered a good score, but most lenders are looking for a score of at least 620. There are a number of different loans available, even if your credit score is not that strong.
Credit Scores and Mortgage Types
If you have a high credit score, you’re going to want to get a conventional loan. This is the most popular type of loan and almost every lender will offer it. The only qualifications needed are a credit score of 620 or higher, a debt-to-income ratio lower than 43 percent, and a down payment of at least three percent. This loan is your best option when it comes to getting the lowest rates for your mortgage.
If your credit score is lower than 620, don’t worry, there are still loans accessible to you. With low down payment options and a lower credit score limit, an FHA loan will probably be your best choice. Some of the benefits to this type of loan include qualifying even if you have filed bankruptcy and they can incorporate the closing costs into the loan.
To qualify for an FHA loan your future home:
1) must be appraised by an FHA-approved appraiser,
2) must be your primary residence,
3) must be occupied by you within 60 days of closing,
4) must undergo an inspection.
Unlike a conventional loan, you will have to pay a mortgage insurance premium on your FHA loan.
Credit Dos and Don’ts:
1. Don’t make large purchases during the mortgage process…even if there’s delayed payments. The total will still count in your debt-to-income ratio…and can change your pre-approval status, so beware!
2. Don’t open a series of credit accounts or take on several small loans to increase your credit history quickly. Remember, balance is the key, and a bunch of new accounts can make you look financially unstable or risky.
3. Do make regular payments and pay down any high balances. Hard work, but worth the increase in credit score.
4. Don’t close a bunch of accounts to “clean up” your credit score. A sudden reduction in accounts can count against you. If you do choose to close an account or two, try to choose a “younger account” as that will raise the age of your average history and improve your score. Closing all the older accounts will count against you.
5. Do check your credit report annually. Errors and identity theft take time to correct, and while you are trying to get a mortgage is NOT the time for lengthy resolutions!
6. Don’t assume that paying off balances at the end of the month will improve your score. While lowering balances is good, eliminating monthly payments on debt gives FICO less to score, and less history of on-time payments…so do pay some balances over time, to keep your score up and your credit history healthy.
7. Don’t get overwhelmed while figuring out what credit score is needed to buy a house in Ohio, contact us with any questions and remember our team is here to help you every step of the way.
To learn more about purchasing property in central Ohio, don’t miss the Ultimate Guide to Buying a Home in Columbus, Ohio.