July 5th, 2020 10:50 AM by Jackie A. Graves
Credit scores are
an integral part of the American home-buying process.
According to the U.S. Federal Housing Administration (FHA), the credit
score required to qualify for mortgage loans is 580 with a 3.5
percent down payment of the total home price. For reference, the highest
FICO score available is 850 and the minimum credit score is 300, according to Experian.
Take note, first-time home buyers: The fact is, the higher your
credit score, the easier it is to buy a home, and the easier it is to qualify
for a lower interest rate. That’s a cold, hard fact.
To see what kind of rates
you qualify for today, check out online marketplace
Credible, which allows you to compare multiple lenders at once to
ensure you secure the best deal.
What’s less clear is how to navigate the often cluttered and
confusing path to a home loan based on a good credit score. Credit score
misinformation – let’s even call them myths – can cause home buyers to pay more
for a home than necessary (in the form of higher interest rates) or even lead
to their being denied a home loan.
What are the credit score myths that buyers need to know in
order to qualify for a better home loan?
These misconceptions top the list:
Myth #1: Shopping around dents your credit score.
“The biggest myth I see is that shopping around hurts your
credit score,” said Drew Cheneler, founder of the Simple Money Lyfe personal
financial website. “Actually, shopping around can literally save you thousands
of dollars, and will give you multiple options to choose from.”
But before you start
searching, make sure you eliminate debt – that will boost your credit
“The best things
first-time homebuyers can do is to pay down their existing debt as much as
possible,” Cheneler said. “Mortgage lenders love to see minimum debt. So pay off your personal loans,
credit cards, and student loan debt as much as you possibly can.”
Myth #2: Paying off long term debt will increase my credit score.
This outlook may apply
to revolving credit, such as
credit cards, but not for long term debt such as a home equity loan.
“If you’ve been consistently paying long term debt on-time for
years, paying the debt off means you have fewer active credit accounts and your
score may drop by a small amount,” said Caleb Liu, owner of House Simply sold,
a home sales company based in Los Angeles, Calif.
Myth #3: A negative credit history will block you from landing a
That’s not so, according to Yawar Charlie, director of estates
division at Aaron Kirman Group, in Los Angeles, Ca.
“The biggest myth that I hear about someone’s credit score and
their ability to purchase a home is that if they’ve had something negative in
their past, that mortgage lenders will not offer them a mortgage," Charlie
said. “If you have a better credit score and a positive payment history there
will be more lenders that are willing to lend at competitive interest rates.”
Charlie notes that if you’ve made some mistakes in the past or
even had a bankruptcy, there are mortgage lenders that will work with you. “It
just requires you to put more of a down payment down and you may have a higher
interest rate,” he said.
Myth #4: Your credit score needs to be in the 700s to get a
Not true. You can still qualify with low credit scores, said Dr.
Ndidi Ihim, chief executive officer with Avim Systems, Inc., a credit
restoration company in Houston, Texas.
“You can get a mortgage with even a 500 credit score but to
qualify for great interest rates, a 680 or better is required,” said Ihim.
Myth #5: A better job equals a better credit score.
Ihim said he regularly sees clients with big incomes having
trouble with getting a mortgage. “Working in the credit industry, I’ve seen
people in high paying jobs have worse credit than people earning minimum wage,”
Cold hard facts on credit scores and mortgages
The best moves to make to get a good mortgage deal? These tips
from Ihim aren’t myths – they’re for real.
Don’t make any big purchases, like a car, with your credit months
before you buy your home.
Don’t exceed 30 percent of your credit utilization for
good results (but best is under 10 percent).
Remove negative items on your
credit report as soon and as much as possible.
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