Feb 09 2022

Understanding Credit Scores and Home Buying

Your credit score plays a big role in your mortgage eligibility. And understanding this is often the key to getting your dream home.

Your credit score plays a big role in your mortgage eligibility. And understanding this is often the key to getting your dream home. Here’s what a credit score is and why it matters when you’re looking to buy a house.

First, what is good credit? From the perspective of your lender, good credit means a history of using the credit you’ve been given in the past with care and paying back previous loans according to their terms. With these positive credit behavior patterns, you are more likely to get approved for a mortgage at a low interest rate with favorable terms.

Credit Reports and Credit Scores Are Not the Same Thing

A credit score is a number that’s assigned to you as an estimation of your worthiness to get credit. A credit report is a detailed look at your credit history. Let’s drill down a bit on each.

  • Your credit report shows how much money you have borrowed, how you’ve paid it back, and how much credit that you have available to you. The report includes debts such as student loans, auto loans, and credit cards, among others. Credit reports also show any red flags, such as referrals to collection agencies, long-overdue bills, bankruptcies, and tax liens. You have a right to receive your credit report; federal law requires each of the nation’s big three credit reporting companies to give you a free copy of yours. You should check out your credit report before applying for a mortgage.
  • Your credit score is a number between 300 and 850, determined by a number of factors related to how you’ve managed credit in the past, including the type of credit that’s been extended to you and for how long. The most commonly used credit score is the FICO score, created by a data analytics company previously named the Fair Isaac Corporation, now simply FICO.

Factors That Determine Credit Scores

  • Payment history is a big factor in determining a credit score. About one-third of the calculation that sets your credit score relies on how you’ve made payments on your bills. Consistent on-time bill paying gets you good marks, late and partial payments will result in negative marks.
  • Balance ratios rank a close second. Known in the finance world as a credit utilization ratio, this split between the debts you owe and the amount of credit you have available is hugely important in determining your credit score. Keeping this number under 30% has a positive impact.
  • Credit timelines come in third. Got an old credit account you rarely use? Don’t close it! The longer you’ve had a credit account, the better this longevity contributes to your credit score. Conversely, closing longtime accounts could lower your score.
  • Your credit mix is also considered. Lenders like to see diversity with credit, giving credence to the fact that you can handle a variety of credit situations. Open credit, revolving credit, installment credit — it all comes together to paint a good credit picture.
  • Recent credit activity plays a part. The flip-side of credit longevity, a flurry of recent credit activity doesn’t bode well for a credit score. While not as significant a factor as payment history or balances owed, applying for multiple credit accounts over a short, recent period can put a dent in your credit score.

What credit score do I need to get a mortgage?

This is often the biggest question people ask before they apply for a mortgage loan and the one that weighs the heaviest in their minds as they await approval. While this varies from lender to lender and other factors may influence the results, a credit score of 620 is generally considered the floor for getting approved for a conventional mortgage. A score of 740 or higher is often considered the range to get the best possible terms and best interest rate on a conventional mortgage.

Can you still get a mortgage if your credit score is in the 500s? Yes. Though if your credit score falls below 620, your best bet is usually to apply for an FHA Loan mortgage, as government-backed loans often have lower credit-score thresholds — with higher down payment requirements based on your credit score. If you have a score of 580 or higher, you may be able to get an FHA loan with only 3.5% down. With a score in the 500 to 579 range, you’re probably looking at a 10% down payment to secure an FHA mortgage.

Specifically designed for veterans and active-duty members of the military, VA Loans are similar to FHA Loans in that they are guaranteed by the government, backed by the Department of Veterans Affairs. The credit-score requirements tend to skew slightly higher for VA Loans over FHA Loans; 600 to 640 is a common range for getting approved for a VA Loan, which often has the advantages of 100% financing with no down payment and no requirement for mortgage insurance.

How can I improve my credit score?

While there is no quick fix, there are steps you can take to improve your credit score. If you have long-standing debts, such as student loans, paying them down will help. All the better if you can close out the debt. But don’t close out paid-up credit cards; best to keep these open as longer-term lines of credit positively affect credit scores. If you can’t completely pay down a credit card, making more than the minimum monthly payments will help.

What if my credit score is still too low to get a mortgage?

Whether it’s due to no credit or bad credit, this is an issue many would-be borrowers face. For many, having a co-signer who does have a good credit score is the answer. Another option is to have another person, a family member or a significant other, buy the home and put your name on the title. When your credit score improves, you can then apply to refinance to have the mortgage in your name.

A good credit score can change your life, handing you the keys to the home you desire. And when you’re ready to embrace that change, lenders at City Lending are ready to serve.

Thinking about buying a new home or refinancing? Call today to get pre-approved.

These days, more and more people are looking to buy their dream homes, especially as remote work and work-from-home setups have become an enduring trend. A 15 point increase in requests for home tours and other home-buying services, along with a 11% rise in Google searches for homes, indicate an uptick in demand to buy houses in the country. However, there is a definite worry about affordability when it comes to housing, especially as hefty price tags on available residences have kept the market just as competitive as before, if not more.

According to the latest reports from analysts, it’s not all bad for existing homebuyers and aspiring house hunters. As previous data shows, timing matters in the housing market, and working on different approaches to home buying – like through a reliable lender – can help advance you towards more affordable housing goals. Below, we discuss whether house hunters should buy now or wait, and why.


What is your financial situation?

Counter to the rise in home demand, there is a considerable lack of supply. Along with rising prices and interest rates, the housing market may seem like a highly competitive space with wealthy homeowners fighting for what little property is left. It can be overwhelming, but knowing where you stand financially can help you better strategize your home buying journey. Following the four key components of affordability, ask yourself:

  • How much do you have saved for a down payment?

  • How much does your household earn?

  • What debts do you carry?

  • What is your credit score?


Familiarizing yourself with these components will help inform your decision on whether or not to wait. For example, taking the time to improve your credit scores before committing can save you from higher interest rates in terms of your monthly mortgage payments. Alternatively, many young homebuyers are compromising by living with family for a significant amount time to save up for a down payment. Getting this out of the way when you’re able to can help you get better loans to buy sooner than later in case interest rates end up increasing.

What kind of home is best for you?

Buying a home is a huge purchase and a big commitment. With shifts to digital and remote ways of working taking place in recent years, this has provided homebuyers with opportunities to be more flexible when buying homes. Homes in areas away from busy cities and urban hubs, for example, are considerably cheaper. This makes them a perfect option for buyers who work from home, or aren’t required to be present in the office on a consistent basis.

The lifestyle you expect to live is as much a factor to consider as money. Condos and townhouses offer lower maintenance costs in the long run, and are perfect for smaller households when compared to single-family homes. If the household grows, homebuyers looking for a side income can even invest in renting out purchased properties to passively earn back what they spent and look into bigger properties for family use.

What does the future look like?

In a previous post, we talked about the rising mortgage and interest rates. While the market may seem bleak or intimidating in its current condition, housing experts also believe factors such as supply have a high chance of returning to pre-pandemic levels by the end of 2024. If you are financially able, buying now while others may be intimidated by the prices can give you an edge. Conversely, taking some time to get your finances in order can benefit you when it comes to securing better loans and lower interest rates.

Working with experts can help you make better decisions for the loans you need, making sure you don’t get trapped with high interest rates or hidden charges. The future of fintech suggests that big data is the future of loans, as more online lenders are now using algorithms, which predict potential defaults better than FICO scores do. Data is also leveraged precisely to identify customers who fit various products well — which can give you peace of mind, as an aspiring borrower. Here at City Lending for example, we find the right programs to fit your needs and profile, making sure you get some of the lowest down payments and interest rates along with a premium service.

And if you’re still unsure, it’s worth considering that waiting it out in the market’s current wild conditions could result in even higher interest rates in the future. At the end of the day, buying a house is ultimately a huge investment, which comes with benefits such as privacy and a financial investment that for the most part will weather most economic storms.

Find out if this is the right time for you to get a house by contacting one of our loan officers today.


Content intended only for the use of citylendinginc.com

Written by Alicia Christopher

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