Your Credit Report and Credit Score (FICO) could be the biggest hurdle for you to clear when it comes to buying a home. Low credit scores don’t necessarily keep you from homeownership but they will be a big factor in determining how much home you can afford and how much cash you must come up with to secure a mortgage for the home you want. For an FHA loan, applicants are required to have a minimum credit score of 580 to qualify for the low down payment advantage, which is currently at around 3.5 percent. However, if your credit score is below 580, you may still qualify but will have to put down a 10 percent or more. In addition, two mortgage insurance premiums are required on all FHA loans: The upfront premium is 1.75% of the loan amount, $1,750 for a $100,000 loan. This upfront premium is paid when the borrower gets the loan. It can be financed as part of the loan amount. The 2nd is called the annual premium, although it is paid monthly. Here is a tool to determine how much an FHA mortgage will cost: FHA Mortgage Calculator
For conventional mortgages, you may be able to qualify for a mortgage if your credit score is low but your interest payment will be higher and the bank may require a greater downpayment.
Consider the following rough guide from Smart Assets:
- Excellent (760-850) – Your credit score will have no impact on your interest rate. You will likely be offered the lowest rate available.
- Very good (700-760) – Your credit score may have a minimal impact on your interest rate. You could be offered interest rates 0.25% higher than the lowest available.
- Good (660-699) – Your credit score may have a small impact on your interest rate. This means rates up to .5% higher than the lowest available are possible.
- Moderate (620-660) – Your credit score will affect your interest rate. Be prepared for rates up to 1.5% higher than the lowest available.
- Poor (580-620) – Your credit score is going to seriously affect your interest rates. You may be hit with rates 2-4% higher than the lowest available.
- Very Poor (500-580) – This is trouble. If you are offered a mortgage, you’ll be paying some very high rates.
Depending on your individual circumstances, the effects of your credit score on your interest rate may be smaller or larger than those listed above, but the general message should be clear. The lower your credit score the more expensive the mortgage and the more expensive the mortgage, the less house you can buy.
Credit scores also affect renters
Just about every landlord now asks to see credit reports. The rental market in some locations is extremely tight, as is the case where I work. I have seen some good candidates lose their bids on rentals with credit scores over 700 because there were some minor negatives in their reports. I was also astounded when a landlord I was representing turned down 2 candidates who offered to pay the entire annual rent upfront because their scores were lower than one who had a credit score above 800 (income was about the same). As you can see, some landlords, especially those with very desirable units, put a lot of weight on your credit score when making a decision.
Very troubling news about Credit Reports
According to Florida Realtors, The Consumer Financial Protection Bureau (CFPB) highlighted credit score problems faced by Americans in its monthly consumer complaint snapshot. According to the report, consumers continue to complain about incorrect information on their credit reports, as well as difficulty having errors resolved.
“Credit reports are the foundation of consumers’ financial lives,” says CFPB Director Richard Cordray. “Consumers continue to express their frustration about inaccurate information on their credit reports and difficulty in getting these errors fixed. We will continue to work to ensure that credit report disputes are investigated, errors are fixed and consumers are treated fairly.”
Consumer reporting companies track a person’s credit history and other information. Errors in a consumer’s file can affect everything from their eligibility to take out a mortgage to whether they’re eligible for a job. Since the CFPB began accepting credit-reporting complaints in October 2012, the Bureau has handled approximately 143,700 of them.
Credit score complaint topics
Incorrect information on credit reports: 77% of credit reporting complaints submitted to the CFPB relate to incorrect information appearing on their reports. Frequently, these complaints are about a debt collection item that has been paid but appears as an unpaid debt on the report, a debt that is not recognized by the consumer or a debt that is no longer due because it passed the point of being enforceable in court.
Difficulty disputing inaccuracies: Consumers consistently report difficulties disputing inaccuracies on their credit report, including long delays trying to speak to a representative at the consumer-reporting company that created the report or the company that furnished the information. Other consumers complained about negative customer service experiences when they were able to get through.
High-volume complaint companies: Out of all credit-reporting complaints submitted to CFPB between December 2015 and February 2016, 95 percent involved the three nationwide credit reporting companies – Equifax, Experian and Transunion, though some of the complaints focused more on the information other companies furnished to the top three credit reporting companies.
Specialty consumer reporting companies
Consumers also submitted more than 2,000 complaints regarding specialty consumer reporting companies that specialize in background and employment screening, checking account screening, rental screening and insurance screening.
The absolute first thing you should do when you decide you want or need to find a new place to live is to get an update report from three major credit reporting companies. One of the easiest ways to do this is visit https://www.annualcreditreport.com/index.action.
Check the report for accuracy follow these tips and guidance for consumers who want to review their credit report and improve their score.