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A good credit score can vary by the scoring system being used, the criteria of the lender applying it, and the particular version of the scoring model that the lender uses. Overall, when you see a score in the 670-730 range, that’s good. Higher credit scores mean you can get better rates, better approval ratings, and access to more favorable terms. When you fall below that range getting approvals can mean depending on other factors in your credit picture. So, what is a good credit score when it comes to getting a home construction loan?
FICO vs. VantageScore: What’s the Difference?
The Fair Isaac Corporation (FICO) is the dominant scoring system that became the industry standard for lenders making prescreened credit offers, approving or denying applications for new credit, and managing their existing credit accounts. It is still the major score (or a variation of it) used my mortgage or construction loans lenders when evaluating borrowers and most likely that his the score you need to care about and focus on.
An important model that is gaining on FICO for credit scoring is VantageScore. It is a credit scoring model that first emerged in 2006 as a joint venture of the big three credit bureaus — Experian, Equifax and TransUnion. It is the score you are typically being shown if you have a credit card that provides free credit scores and is also the one displayed by Credit Karma, a popular credit knowledge site on the web.
So, What is a Good Score?
When it comes to your FICO® Scores are used by many lenders, and often range from 300 to 850. Generally, a FICO® Score above 670 is considered a good credit score on these models, and a score above 800 is usually perceived to be exceptional.
Scores by VantageScore are also used by lenders. The latest VantageScore 3.0 model uses a range between 300 and 850. A VantageScore above 700 is generally considered to be good, while above 750 is considered to be excellent.
But Wait, What Credit Score is Actually Being Used for my Mortgage?
Whether you go to Credit Karma (which uses VantageScore) or pay for your FICO score (or get access through a credit card company) you are really only getting an “educational” credit score. These scores will provide you with a perspective on your credit standing. They probably aren’t the scores that your lender will actually use to approve your credit application.
When you try to borrow money; whether it be for a new car, a credit card, or a home, the lender will typically pull a credit report. Depending on the purpose of the loan, the lender may be using a FICO or VantageScore to evaluate your credit worthiness. When consumers get a score, they will see the standard version of it. FICO is on version 9 of its scoring model and VantageScore is on version 3.
What most people don’t know is that FICO, the company that has owned the credit scoring industry for years, has dozens of specific algorithms and scores for many industries. If a lender that offers car loans pulls a credit report it is most likely using the version of the credit score that predicts how well you pay your car payments. If you are getting a credit card, the credit card company is requesting a credit score using the model that best predicts how well you will pay your credit card bill.
It is the same with home mortgages. While version 9 is currently available, FICO model 8 is the one in general use. However, mortgage lenders are required by law to use FICO 4. It’s the only tool to evaluate credit risk that is approved for use by government-sponsored enterprises such as Fannie Mae and Freddie Mac (the government backers of most home mortgages). FICO 4 came out in 2004. What this means is the FICO score you get from any source won’t match the score your mortgage lender uses because of the way it evaluates information on your credit report.
Is Your Credit Score More Important for a Construction Loan?
When you apply for a loan, lenders typically have specific loan programs. The lender have established criteria and terms for each program. Many don’t realize it but most lenders create loans and then sell them. To sell them they have to meet certain minimum terms. These terms are established by Fannie Mae, the common term for the Federal National Mortgage Association. Fannie Mae determines the minimal standard that lenders have to set for borrowers to make the loan saleable. While that may sound complicated, it basically keeps funds flowing so lenders can sell existing loans and keep making new loans to more and more home buyers.
When you buy an existing home, whether new or used, it actually exists. It is ready to be lived in. Should you get a loan and not be able to make the payment the lender (or whoever has purchased the loan) has an asset that they can sell to try and recoup the amount owed. When you are building a home, that isn’t the case. There is no home on the land for collateral.
Unless you are paying cash for a home, a construction loan is needed to build a home first before a conventional 15 year or 30 year mortgage can be given for the long term financing. The problem is, without an asset in place the bank is lending money on the promise that a home will be built and at the end of the construction process they will have collateral. But what if something happens along the way and the home isn’t completed?
What Can I Do to Improve My Credit Score?
If you don’t have a 680 credit score there are many things you can do to improve it! First, get a copy of your credit report. That shows you the building blocks of what impacts your score. You are entitled to one free copy of your credit report every 12 months from each of the three nationwide credit reporting companies. You can order them online from annualcreditreport.com, who is the only authorized website for free credit reports, or call 1-877-322-8228. Review for errors and get any fixed. The FTC says that 21% of all credit reports have confirmed material errors. These errors, left unfixed, could be the difference in building a home or not.
Which score is the important one? Here are 5 basic items you need to do raise your credit score:
1.Keep credit card balances below 30% of available credit
2.Eliminate credit card balances altogether
3.Leave old debt on your report
4.Use your credit
5.Pay your bills on time
While these may sound simple, doing these simple things consistently creates a strong credit score over time.
Qualifying for the Loan to Build Your New Modular Home
While construction loans are harder to get, people are building homes every day. When you decide it is time to build your new home and you know you will need to finance it, don’t wait. The very first place you should go is to a construction loan lender and get qualified for a loan. It is important to know if you qualify, and how much you qualify for, before you ever start looking at home plans.
Modular homes are less risky to build. Because they are built in a factory and delivered 75% – 85% complete, the home is done quickly leaving less of a chance for something to go wrong. Even if it does, the home is set and protected and substantially complete. Modular homes reduce the risk for construction loan lenders.
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