Buying a home can be frustrating at times especially when it comes to credit scores. To begin with, home buyers should know that credit scores fluctuate frequently and there are several different types of credit scores.
Most mortgage companies will determine a borrower’s creditworthiness based on FICO® scores, a Credit Score developed by Fair Isaac Corporation. This score is used to inform the lender of risks that may be involved when lending to you. Each of the three credit reporting agencies has a different name for their FICO scores and different versions of the FICO formula. Here are the specific versions of the FICO formula used by mortgage lenders, Equifax Beacon 5.0, Experian/Fair Isaac Risk Model v2, and TransUnion FICO Risk Score 04. These names and formulas in and of themselves can be very confusing, but the bottom line is that a person is a 650 or higher credit score will most likely be able to be approved for a conventional loan. If the credit score is lower and goes as low as 580, then this borrower will most likely be best suited for an FHA or Government Backed Loan.
It is important to note that a credit score can increase rapidly by making payments on time for six months and paying debt down to a 20% debt to limit ratio. It is not important to have zero balances as that can hurt your credit score. Maintaining a 20% or lower debt to limit ratio for each of your credit cards for several months can dramatically increase a credit score.
Credit scoring companies such as Credit Karma or others do give lenders a way to gauge their credit scores, but these are not accurate scores and should be taken with a grain of salt. It is best when beginning the process of researching for a home purchase that home buyers sign up for the three major credit reporting agencies scoring monitoring in order to be aware of any issues that they see may arise during the process and to make sure that the requirements of the 20% of debt to limit ratios are being met and that all payments are being reported as on time every month.