FAQ: Will a low credit score stop me from buying a home

The simple answer is yes. 

The longer answer is that buying a home is a major decision – one that takes thought and consideration.  So, before you even begin to look at purchasing a home, you should take a look at your credit score and your credit reports from all three credit bureaus – Experian, TransUnion, and Equifax. Make sure they are accurate, and if your credit score is low you will need to work to raise the score so you can get the best interest rates. 

How a credit score is calculated

To raise your credit score, you need to understand how it is calculated. A credit score is determined by taking each of the following five sections of your credit report and weighting them according to a set standard.

Source: myfico.com

Credit scores range between 300-850. A credit score of 700 or above is generally considered good, and a score of 800 or above on the same range is considered to be excellent. Most credit scores fall between 600 and 750. However, many mortgage lenders require a score of 620 to 640 to qualify. But reality is problems arise when your score falls below approximately 650. 

How to raise your score

1.  Check your credit reports.  Your payment history is the largest contributing factor to your credit score.  An error can dramatically impact the actual score, so look at the payment history. If there is an error, work to correct it with the credit bureau.  You’ll want to keep detailed notes about whom you contact and what actions are needed or being done to fix the error. 

If the late payments aren’t errors, set up electronic payment reminders to get your bills paid by the due date. You can do this through any number of bill pay apps or calendar reminders.

2.  Reduce the amount of debt you owe. Behind payment history, the amount of your outstanding debts figures heavily into your credit score. The best way to do this is to stop using credit cards or other lines of credit. One option: create a payment plan that puts most of your available funds towards the highest interest rate cards first, while maintaining minimum payments on your other accounts. 

3. Negotiate.  If you have a delinquent credit card account on your credit report, this is a significant drag. Consumers may ask creditors to accept partial payment to resolve the debt.  The creditor can accept or counter it.  Make sure you have all details in writing and don’t make a payment until you have the accepted proposal in hand.

4. Open a new credit account … or not.  With the help of a financial advisor (or one of our housing credit counselors), look at how opening a new credit account can help or hinder your score.  For someone who has a $500 line of credit that has no balance increasing available to credit to $1,000 can be beneficial because it increases the debt ratio. For someone whose $500 card limit is maxed, increasing the line of credit doesn’t increase the debt ratio enough to matter.  

Also, hard credit inquiries do impact your credit score. A hard credit inquiry is when you initiate a look at your credit history. This happens when you fill out an application for credit cards, housing, etc. If you have more than two hard hits in a short period, it can lower your score several points.

A few additional tips:

  • To get started on examining your credit reports, visit www.annualcreditreport.com to access all three reports. Once a year, you have the right to examine your credit history for free. The only place you can do this, however, is through this website.
  • If you have questions or are stumped about cleaning up your credit history and increasing your credit score in order to pursue purchasing a home, contact our housing counselors at 515.243.1277 Option 3.
  • The Consumer Finance Protection Bureau provides a comprehensive section on its website about purchasing a home. Included in this section is additional information about how to raise your credit score.
  • For those who are ready to make the step to looking at potential homes, we offer an online certification course called eHome, a homebuyer education course. This course leads you through a number of steps so you understand what it takes to own a home, plus it gives a certificate to present to your mortgage lender declaring you understand and are ready to become a homeowner.

Our HOME, Inc. housing counselors are here to help.  Contact our office at 515.243.1277 for more information.

Our FAQ blogs are based on questions our housing counselors receive. Sources for this blog include: Consumerfinance.gov, myfico.com, www.creditkarma.com, www.clarke.com

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