We have been receiving a lot of finance questions from our clients about purchasing and selling a home. We want to make sure our clients receive the most accurate information, so we teamed up with Karen Jackson from First Priority Mortgage to answer the most common real estate finance questions. Karen has been providing lending advice and assistance for over 20 years in PA, DE, and NJ. She is one of our in-house mortgage lenders at Keller Williams Brandywine Valley that we recommend to many of our clients.

Let’s jump right into this weeks topic: fixing credit scores. What credit score do I need to purchase a home? What should my debt-to-income ratio be? How are credit scores determined? What are some tips to increase my credit score?

What credit score do I need to purchase a home?

This really depends on the type of financing you choose. With conventional financing, the best terms will be for credit scores over 740. With FHA financing, we can go as low as 580, pretty easily. There are a few scenarios where you can go lower than 580, but they’re pretty difficult to achieve. There are also cases where we are working with someone who has no credit. In that situation, we can “build” an alternate credit report with things like rent payment history, utilities, and other bills that wouldn’t normally show up on a credit report.

What should my debt-to-income ratio be?

A debt-to-income ratio is the percentage of gross monthly income that is allowed to be used up by the new mortgage payment plus other monthly expenses from the credit report. Things like insurance, phone bills, etc. do not count in these numbers.

The debt-to-income ratio also depends on the loan type, and other factors that could affect someone’s ability to qualify. A buyer’s comfort level with the monthly payment is also a factor.

Generally, here are the maximum debt-to-income ratios for the different loan types:

Conventional – 50%
FHA – 57%
VA – fluctuates greatly, but probably as high as FHA if there are other positive factors in the loan
USDA - 41%(43% with compensating factors)

How are credit scores determined?

Mortgage credit scores are different than what you will see online as a consumer, or what other types of creditors receive (stores, auto finance companies, etc.). Credit score models are weighted slightly different with each bureau: Trans Union, Equifax, and Experian. In general, there are 5 things that can affect your credit:

How you have paid your bills:
- Having a history of paying your bills on time, will positively affect your score.
The amount you owe compared to your available credit:
- Especially with credit cards. In general, it is best to keep your credit card balances low at all times. Less than 10% of the limit is ideal for credit card balances.
The age of your open credit:
- The longer your history, the better it is for your score. This is why you do not want to close older credit cards, unless it is really necessary.
The mix of credit types:
- It is a good idea to have different types of credit. A mix of credit cards and loans is the best, and once you have a mortgage, that helps too.
Credit inquiries:
- Having different types of companies puling your credit in the last 6 to 12 months can negatively affect your score, BUT, having multiple of the same type of company pulling your credit is different. Two mortgage companies pulling your credit will only have the impact of one inquiry. This change was made a few years ago to allow consumers the opportunity to shop for car loans or mortgages without the negative impact on your credit score.

What are some tips to increase my credit score?

Pay your bills on time
Keep your credit card balances low or pay them down.
Don't close older cards
Don't open new credit
If you have collection accounts, it’s often best to leave them alone since paying them off just renews the reporting of the account. It can depend on the card though. Karen can run those scenarios to let you know what to do.
Do NOT dispute negative credit accounts if you plan to apply for a mortgage. This removes the account from your credit score which artificially inflates your score. Mortgage underwriters will require you to remove the disputes because they will cause your score to be inaccurate. However, removing disputes can take a long time and can cause an issue with getting to settlement on time.
- The exception to this is medical collections. You can dispute those, and in many cases, it is recommended.

If I have a low credit score, how much time do I need to fix it, before I can start to look at purchasing a house?

This depends on how low your credit score is. If it is just a matter of lowering credit card balances to improve your score, that can take about 30 days to be reflected in your score. However, if your score is very low, and you want to do actual credit repair through a credit repair company before starting with a mortgage, that can take up to 6 months or more.

It is never too early to talk to a mortgage lender. I was recently talking to a first time buyer, who does not want to purchase yet, but she wants to start saving. She’s not sure what her credit score should be, how much money she might need to save for closing costs, and other expenses. I sent her to Karen to have some of her mortgage questions answered.

As Realtors, we cannot give advice on mortgages, so make sure you talk to a mortgage professional to learn more about your individual situation. If you would like us to put you in touch with a mortgage lender, or a credit-repair person, we can give you a recommendation.

If you are thinking about starting the home buying process, we would love to help! Send us a message, or check out our FREE How To Purchase A Home Guide, and let us answer any questions you may have. Make sure you keep an eye our for our next real estate finance blog post which will be about how to choose a mortgage lender.

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If you missed our last finance post about closing costs, you can check it out HERE.