Buying your first home can be very expensive and saving for it could take decades. A mortgage makes this American dream a possibility. Find out the credit score you need to apply for it. Also, we will help you avoid some common myths that could hurt your credit score.
Instead of having to wait for ages to save enough cash to buy their own house, many first-time homebuyers choose to take out a mortgage. This is the name given to a loan and legal contract to finance the purchase or renovation of a house. In return for the bank loan you money to purchase or fix a property, it designates your new home as collateral, which means that if you are unable to pay back the loan, the bank can take back the house and sell it to cover the debt.
Now, if you want a mortgage you need to know what credit score is needed for you to qualify. Statistics show that that 9 out of 10 U.S. mortgages go to borrowers with a score of 650 or better. Three quarters go to borrowers with scores higher than 700, meaning that the large majority of mortgages go to Americans with better-than-average credit.
The most commonly used scores taken into account when applying for a mortgage are FICO scores 2, 4, and 5. The credit scores are usually contained in a larger product known as a residential mortgage report or RMCR, which also includes information from Equifax, Experian, and TransUnion. These pieces of information are usually filtered, and thus RMCRs are referred to as merged reports. They are a screened out version of information from different sources.
RMCR is used by mortgage lenders for three main reasons:
1. Not all creditors report to all three credit bureaus and this is why the only way a lender can know your true credit profile is using information from all three.
2. Mortgage lenders use the middle of three credit scores to make their decision.
Therefore, if your scores are 730, 786 and, 680, your score will be 730.
3. RMCRs contain additional information regarding your residence and employment history that is used as verification of what you enter on your loan application.
If your plan is to get a mortgage and you are worried (or already know) that you have a poor score, there are several ways to improve it before you apply. Paying your bills on time is the best way, of course, but other factors, like the amount of unused credit available to you or the length of your credit history, are also important.
AVOID THESE 5 MYTHS ABOUT CREDIT SCORE
Your credit score plays a big role in your financial life and having a bad record can have negative consequences in several aspects of your life. But you’ve probably heard a lot of things about FICO score that are simply not true. Myths are part of our everyday life, but some of them might have a bigger impact than others. When it comes to your credit score, here are some myths to bust:
1. ‘If you check your credit score, it will drop’
There are two ways of checking your credit score: hard inquires and soft inquiries. A hard inquiry is the one that creditors run before they approve your loan or credit line. Too many of these can lower your score, that’s true. But soft inquiries, which are basically quick looks just for educational purposes, won’t affect your score at all.
2. ‘If you close your credit card, you will improve your score’
Creditors like to see that you can use credit responsibly. So the best you can do is paying your full balance every month and not carrying debt. Closing all of your credit cards will actually hurt your score. If you do need to close accounts, start by closing the newer ones and keep the older ones open, because they are more helpful to your credit score.
3. ‘There’s no need to check your score if you already know it’s bad’
Most people tend to say this and it is just not true. A good and healthy habit is checking your score at least once a year. People with bad credit score tend to skip this step, but it is important to keep track of it. Mainly because credit bureaus make mistakes sometimes, and you might be penalized for someone else’s problems. If you find any error or incorrect information, you can report it to the credit bureau and have it removed, but if you don’t check your score, you won’t be able to find anything.
4. ‘If you pay your debt, it will disappear from your record’
This is not entirely true. Your debt will disappear…eventually. Credit records are long-term studies of how a person handles credit and debt, so every item remains in your credit history for seven to ten years.
5. ‘Only credit card debt will affect your credit score’
Unfortunately, this isn’t true. In reality, almost any kind of debt affects your score negatively, whether it is credit card debt, loans, unpaid parking tickets or overdue medical bills. Even paying your rent or utility bills late can have a negative impact on your score.