Many people tend to go into paralysis at the thought of buying a house because they’re worried that their credit score will hinder their ability to purchase. To dig deeper on this subject, we sat down with local mortgage loan officer Chris Woods to help provide a little bit of insight on how credit scores are used when purchasing a home.
Different Types of Credit Reports
First, it’s important to understand that there are differences in credit reports.
Did you know credit cards, car loans and mortgages each have a uniquely different way of analyzing credit data?
Chris Woods explained that “because of this, each report can yield different credit scores.” For this reason he states “it’s important to obtain a credit report directly from a mortgage lender if you are looking to take out a mortgage. This way you have a better idea of your true credit score for the loan type you are seeking.”
Type of Loan Plays a Role
There are also different loan options. Depending on the type of loan you are applying for, the minimum credit score may vary.
According to creditsesame.com, “a conventional loan for a house that’s backed by Fannie Mae or Freddie Mac, the minimum score required is set at 620. But the lowest credit score to buy a house with an FHA loan is 580.”
However, Woods notes that “while some programs do have minimum credit score requirements, it is important to know that just because an applicant may meet the credit score minimum for a particular program it does not necessarily mean that the applicant will be approved. Other details inside the credit file such as public records, bankruptcy, foreclosure or additional criteria may not single handedly yield a negative credit decision, but together they can contribute to a lender’s decision on whether or not to grant credit.”
So What’s the Average Credit Score?
Now that you know there can be differences in credit scores depending on what type of credit is being requested, let’s take a look at what the average credit score is in the U.S.
- According to Credit.com, in 2016, Experian’s annual credit report showed an average score of 673 based on the VantageScore model.
- The average FICO credit score was listed at 699, which was an all-time high.
While it’s nice to have a general idea of what the average score is, let’s remember that these numbers could fluctuate depending on the type of credit being applied for.
Economic Strength Factored In
Depending on the strength of the economy, lenders may enforce tighter lending restrictions. In fact, when the housing market collapsed, there were reports of people being rejected for loans who had 720 and above credit scores.
Now that we are seeing a strong nationwide housing market, lenders have once again relaxed their restrictions.
Doesn’t Pulling My Credit Harm My Score?
When presented with this question, Woods stated that “While there is some truth to this, it is not nearly as big of a factor as many consumers are led to believe. Typically, there is more damage done by not receiving a field specific credit report as far in advance of the credit need as possible.
For example, a credit inquiry in rare instances may lower a credit score marginally, but they are typically short term effects.” Woods also says that “deciding not to obtain a credit report in advance may actually negatively affect the consumers chance to make minor changes to their credit profile.”
So How Do I Know What Credit Score I Need to Buy a Home?
Because the strength of the economy, type of mortgage product being applied for and various consumer behavior all play a role in loan approval, it is nearly impossible to pinpoint an exact credit score needed to buy a home.
So plan ahead and set yourself up for success to purchase your next home:
Reach out to a lender about 6 months prior to get an idea of what range your credit score needs to be in and if there is any work needed to repair your credit before purchasing a home.