Buying a Home and Your Credit Score

Once you've decided to buy a home, the first thing you will need to do is assess your financial situation and qualify for a home loan. A mortgage broker is going to take your credit and income information and then create a profile on you as a long-term borrower.

Your credit score is a one of the key components lenders use to determine how much of a risk you are. Fair, Isaac and Co or FICO scoring creates a computer generated grade and has become the standard for predicting a lender's risk in loaning you money. The three major credit bureaus (Experian, TansUnion and Equifax) assemble your credit information into numerical scores.Credit Score Breakdown

There are five different parts that are assessed and make up your credit score. Approximately 65% of your credit score is made up of how much debt you have and your payment history. The remaining 35% of your score is based on recent credit inquires, length of credit history and types of credit you have such as revolving, installment, etc.FICO Score Ranges

FICO scores can range anywhere form 300 - 850 and the higher your score the better. Generally, if your score is 650 or higher, you will qualify for the best mortgage rates and terms. When your credit score dips below 620, you're looking at higher mortgage interest rates and a higher down payment.The higher Your Score, The less Mortgage You Pay

Basically, your credit score determines how much your mortgage is going to cost you in interest and closing costs. If your score is below 620, it will behoove you to build your credit and get your score at least to 650 before seeking a mortgage. Otherwise, you will be looking at a loan (if you can even qualify) with inflated terms and a higher monthly payment.Steps for Raising Your Credit Score

Start building up your score by:

• Paying off or closing credit accounts that you rarely use.
• Limit credit inquiries and avoid credit applications.
• Pay all your bills on time.
• Reduce your credit/debt ratio (how much credit you have verses how much you owe).
• Correct any credit problems and/or errors on your credit report.

Although FICO credit scoring is definitely the big daddy when it comes to lenders assessing long-term borrower risk, other criteria can also be used to determine your eligibility for a mortgage. FHA and VA government insured home loan programs, for example, take into consideration your individual situation and give a bit more leeway when it comes to your credit history.