What Should My Credit Score be Before Buying a Home and What Else Do I Need to Know?

Before buying a home, it’s recommended you have a credit score above 620 to qualify for a conventional loan. 

There are a lot of loan programs available to help you realize the dream of home ownership. I’m going to share with you the steps to take to get the most affordable mortgage, known as a conventional mortgage. 

While this may require you to spend more time paying down debt and or saving additional money, following these steps will position you to enjoy long-term financial success. 

Here’s what we’ll cover

• The benefits of a conventional loan and a 20% down payment
• What is a credit score and what are the factors that go into it?
• How do I improve my credit score and how long does it take for it to go up?
• What’s the total cost of home ownership?

The benefits of a conventional loan

When you have a credit score of over 620 and you’re able to make a down payment of at least 20%, positive financial things happen.

You’ll get a lower interest rate. While there are other loan programs available to borrowers with credit scores lower than 620 who need to make lower down payments, those programs have higher interest rates which make them more expensive. 

You won’t have to buy Private Mortgage Insurance (PMI). This insurance protects the lender, not the borrower, if the borrower stops making their mortgage payments. 

Whether you’re considering a 15 or 30 year mortgage, interest really adds up. Having a credit score of at least 620 and making at least a 20% down payment can keep your costs and interest as low as possible 

What is a credit score and what are the factors that go into it?

Your credit score is a measure of your creditworthiness, meaning how likely you are to pay back the money you borrowed. There are 7 factors that to into it

1. Your payment history
2. Your current debt
3. The number and type of debt accounts you have
4. How long you’ve had your accounts
5. How much of your credit you’re using, also known as utilization
6. Recent applications for new credit accounts
7. Any negative events such as missed payments, collections and bankruptcy 

How do I improve my credit score and how long does it take for it to go up?

Having a “good” credit score is clearly important, here are five ways to improve it and how long it will take to go up. 

Check your credit report. You’re entitled to a free copy of your credit report every year, which you can access from places like XXXX. Look for any discrepancies and proactively address any you find. 

Pay your bills on time. This may sound obvious, but it’s a very important step in your path to good credit. 

Keep your credit utilization below 30%. If you have $10,000 of total credit across 4 cards, and you have a total balance of $9,000, your current utilization is 90%. If you reduce your total balance to $1,000, your utilization will be $10%.  

Limit your applications for new credit. When you apply for a new credit account, this is known as a “hard” inquiry and can have a negative impact on your credit score. 

Keep old accounts open. The longer you have credit accounts open, the more attractive you appear to lenders. 

How long does it take to improve a credit score? Following the five suggestions above, you can see an improvement in as little as three to six months. Some events, like a Chapter 7 bankruptcy, can stay on your credit report for 10 years.  

What’s the total cost of home ownership?

The total cost of owning a home is far greater than simply the mortgage payment. Figuring out the total cost of home ownership before you buy your house is a smart practice. Here are the main costs to be aware of. 

• Mortgage payment. You’ll know what this will be as you go through the process. If you’d like to speak with someone, you can get in touch here. 
• Homeowner’s insurance. If you’d like to speak with someone, you can get in touch here. 
• Property tax. You’ll know what this will be and can find out what it is in your state.
• HOA fees. This will be an important factor in your home buying process. 
• Utilities. You’ll be able to estimate what these will be when you’re looking at homes. 
• Maintenance and repairs. Landscaping, cleaning, pool service, air conditioning, pest control; the list goes on. Basic and recurring services can be estimated. Major problems like an AC unit breaking, roof leak or electrical problem can be very expensive. These are some of the reasons an emergency fund is so important. 

Positioning yourself for success

I’ve hope I’ve shared some valuable and actionable information with you. It’s my hope that you become a home owner and at the same time, position yourself for long-term financial success. 

We’ve got a lot of resources in the form of courses and coaching I encourage you to take advantage of. 

Check out our Buying Your Next House course and our Improving Your Credit course. 

If you’re ready to take control of your financial life, check out our DIY Financial Plan course. 

W

e’ve got three free courses as well: Our Goals Course, Values Course, and our Get Out of Debt course. 

Connect with one of our Certified Partners to get any question answered. 

If you’d like help getting on the same page with your partner, check out our Same $ Page Course. 

If you’d like to help your kids get good with money, check out our Teaching Kids about Money course. 

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