Your credit score can largely impact your home loan. Before you even begin your quest to find a new home, you should check your credit score by requesting reports from the three main credit bureaus – Experian, TransUnion, Equifax.
By doing so, you can address any errors or take actionable steps to improve your score before you start the application process for a mortgage. Let’s take a closer look at how your credit score can affect your home loan.
What’s Considered a ‘Good’ Credit Score?
Stated by a credit repair Austin expert, a majority of lenders use the FICO model, which essentially evaluates consumers using a 300 to 850-point range. A higher score communicates to the lender that you don’t pose a large risk and are likely to repay borrowed funds.
Putting these numbers on a scaling system would look a little something like this: a score of 800 and above is exceptional, 740 to 799 is considered very good, 670 to 739 is good, 580 to 669 is fair, and 579 and below is poor.
Sometimes boosting your credit score by a few extra points can have a substantial impact on your monthly payments and interest rates.
With a low credit score, you’re vulnerable to having your application denied altogether. If you are approved, you will likely be subjected to some pretty high-interest rates and may even be required to add a co-signer to your loan.
To shed a little more color on what this would look like on paper, let’s take a 30-year 200,000 fixed loan. Based on national averages, borrowers with a score of 760 or higher can enjoy up to an estimated $185 a month in payments.
On the low side of the spectrum, if you have a score within the 620-639 range, you could pay an additional $66,754 in interest over the lifespan of your loan. Ouch.
Qualifying for a Mortgage with a Poor Credit Score
Many people shopping for a new home want to know if it’s even possible to be approved for a home loan with a low credit score. While credit requirements vary from lender to lender, you can still qualify for a mortgage, but your interest rates and monthly payments are going to be incredibly high.
If you’re already struggling month over month with bills, you may want to improve your financial standing before taking on the responsibility and cost of a home loan.
Here’s a look at the average minimum credit scores accepted for various loan types.
FHA Loans
On a positive note, the Federal Housing Administration offers loans to borrowers with poor credit and low down payments. If you have a credit score within the 500 to 579 range and put a minimum of 10% down, your FHA loan application will be approved.
Borrowers who hold a score higher than 580 are required to make a down payment of at least 3.5%.
Conventional Loans
A vast majority of lenders will approve applicants with a credit score as low as 620, but they will likely have other stipulations you must meet, such as your annual income, in order to qualify.
USDA Loans
The USDA loan program is backed by the U.S. Department of Agriculture to support low to moderate-income borrowers seeking to buy property in a rural location. Borrowers typically need to possess a score of 640 or higher to qualify for this loan.
In some instances, USDA lenders will consider approving a lower score after a more in-depth analysis of the borrower’s financial history and credit.
VA Loans
Offered to both veteran and active military personnel (as well as their families), VA loans are backed by the U.S. Department of Veteran Affairs.
While the government technically doesn’t have a minimum credit requirement to qualify, a number of lenders are looking for borrowers that hold a credit score of at least 620.
Raising Your Credit Score
If you have a not-so-great credit score, don’t feel defeated. Your foray into homeownership can still happen if you put a little effort into reviving your credit score.
Here are some quick tips to get you started.
●File a dispute for any inaccurate or missing information on your credit report. Make sure you have supporting documentation to back up your claims.
●Always try to keep your credit card balances below 30% of your total credit limit. By paying these down, it’ll improve your credit utilization ratio and subsequently your credit score.
●Pay your bills on time. Nearly 35% of your credit score is contingent upon your payment history.
●Keep older credit lines open – even if they’re paid off. While closing outdated or unused accounts may seem like a good idea (and remove the temptation to spend), it could actually hurt you in the long run. This is because closing a credit line can bump up your credit utilization ratio, causing your credit score to take an unwanted turn for the worse.
●Avoid taking out large loans or opening new lines of credit. The key here is to minimize the debt you have.
The Bottom Line
While we all like instant gratification, raising your credit score won’t just happen overnight. However, by taking the necessary steps to begin improving your credit standing over time, you’ll eventually be able to qualify for thebestmortgage rate possible.