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Morty - Credit

Morty the Mortgage Guy - Let's Talk Credit Scores

Ah, the dreaded credit score. It’s one of the biggest and scariest criteria required by lenders in the mortgage application process — three tiny little digits that can mean the difference between yes and no, between moving into the house of your dreams and finding yet another overpriced rental; complete with shag carpeting.

The term “credit score” most commonly refers to a FICO score, a number between 300 and 850 that represents a person’s creditworthiness — the likelihood that, if given a loan, you will be able to pay it off. A higher number corresponds to higher creditworthiness, so a person with a FICO score of 850 is almost guaranteed to pay her debts, whereas a person with a 300 is considered highly likely to miss payments.

The formula for calculating a FICO score was developed by Fair, Isaac and Company (now called, simply, FICO), and while the specifics remain a secret so that no one can game the system, FICO has made the components of the score public. The formula takes into account the following factors, in descending order of importance:

  • Payment History – Have you made timely payments on your debt in the past?

  • Amounts Owed – How many lines of credit do you have, and how high is the balance on each?

  • Length of Credit History – How long have you been using credit?

  • New Credit – Have you opened several credit accounts recently?

  • Types of Credit Used – What combination of credit cards, retail accounts, installment loans and mortgages do you have?

 

What credit score is needed to buy a house? There is no hard-and-fast-rule. Here’s what we can say: if your score is good, let’s say higher than a 660, then you’ll probably qualify. Of course, that assumes you’re buying a house you can afford and applying for a mortgage that makes sense for you. Assuming that’s all true, and you’re within the realm of financial reason, a 660 should be enough to get you a loan.

Anything lower than 660 and all bets are off. That’s not to say that you definitely won’t qualify, but the situation will be decidedly murkier. In fact, the term “subprime mortgage” refers to mortgages made to borrowers with credit scores below 660 (some say below 620 or even 600). In these cases, lenders rely on other criteria — reliable source of income, solid assets — to override the low credit score.

If we had to name the absolute lowest credit score to buy a house, it would likely be somewhere around a 500 FICO score. It is very rare for borrowers with that kind of credit history to receive mortgages. So, while it may be technically possible for you to get a loan with a score of, say, 470, you would probably be better off focusing your financial energy on shoring up your credit report first, and then trying to get your loan.

Here's some great news. NOVA® Home Loans has a Credit Services department that is dedicated to helping those who are serious about home buying get their credit on track in order to purchase a home. The only requirement is that you must Apply with NOVA® Home Loans. This service is completely FREE. Not only will NOVA® help you find the best loan program for your situation, Credit Services will also work with you for however long you need to get your ready for your Home Sweet Home experience. 

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