Don’t let these credit score myths stop you from landing a great mortgage deal.
Credit scores are an integral part of the American home-buying process.
According to the U.S. Federal Housing Administration (FHA), the credit score required to qualify for mortgage loans is 580 with a 3.5 percent down payment of the total home price. For reference, the highest FICO score available is 850 and the minimum credit score is 300, according to Experian.
Take note, first-time home buyers: The fact is, the higher your credit score, the easier it is to buy a home, and the easier it is to qualify for a lower interest rate. That’s a cold, hard fact.
To see what kind of rates you qualify for today, check out online marketplace Credible, which allows you to compare multiple lenders at once to ensure you secure the best deal.
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What’s less clear is how to navigate the often cluttered and confusing path to a home loan based on a good credit score. Credit score misinformation – let’s even call them myths – can cause home buyers to pay more for a home than necessary (in the form of higher interest rates) or even lead to their being denied a home loan.
What are the credit score myths that buyers need to know in order to qualify for a better home loan?
These misconceptions top the list:
Myth #1: Shopping around dents your credit score.
“The biggest myth I see is that shopping around hurts your credit score,” said Drew Cheneler, founder of the Simple Money Lyfe personal financial website. “Actually, shopping around can literally save you thousands of dollars, and will give you multiple options to choose from.”
Mortgage buyers can easily shop around for the best deals at Credible.
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But before you start searching, make sure you eliminate debt – that will boost your credit score.
“The best things first-time homebuyers can do is to pay down their existing debt as much as possible,” Cheneler said. “Mortgage lenders love to see minimum debt. So pay off your personal loans, credit cards, and student loan debt as much as you possibly can.”
If you're confident in your credit score, then you can plug in some of your information into Credible's free online tool to find out what kind of mortgage rates you qualify for.
Myth #2: Paying off long term debt will increase my credit score.
This outlook may apply to revolving credit, such as credit cards, but not for long term debt such as a home equity loan.
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“If you’ve been consistently paying long term debt on-time for years, paying the debt off means you have fewer active credit accounts and your score may drop by a small amount,” said Caleb Liu, owner of House Simply sold, a home sales company based in Los Angeles, Calif.
Myth #3: A negative credit history will block you from landing a mortgage.
That’s not so, according to Yawar Charlie, director of estates division at Aaron Kirman Group, in Los Angeles, Ca.
“The biggest myth that I hear about someone’s credit score and their ability to purchase a home is that if they’ve had something negative in their past, that mortgage lenders will not offer them a mortgage," Charlie said. “If you have a better credit score and a positive payment history there will be more lenders that are willing to lend at competitive interest rates.”
Charlie notes that if you’ve made some mistakes in the past or even had a bankruptcy, there are mortgage lenders that will work with you. “It just requires you to put more of a down payment down and you may have a higher interest rate,” he said.
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Myth #4: Your credit score needs to be in the 700s to get a mortgage.
Not true. You can still qualify with low credit scores, said Dr. Ndidi Ihim, chief executive officer with Avim Systems, Inc., a credit restoration company in Houston, Texas.
“You can get a mortgage with even a 500 credit score but to qualify for great interest rates, a 680 or better is required,” said Ihim.
Myth #5: A better job equals a better credit score.
Ihim said he regularly sees clients with big incomes having trouble with getting a mortgage. “Working in the credit industry, I’ve seen people in high paying jobs have worse credit than people earning minimum wage,” he said.
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Cold hard facts on credit scores and mortgages
The best moves to make to get a good mortgage deal? These tips from Ihim aren’t myths – they’re for real.
Don’t make any big purchases, like a car, with your credit months before you buy your home.
Don’t exceed 30 percent of your credit utilization for good results (but best is under 10 percent).
Remove negative items on your credit report as soon and as much as possible.