Your credit score is one of the critical factors that affect your interest rate when you are applying for a mortgage home loan. Usually, the higher the score you have, the better rate you will get from your lender.
It is a good idea to check your credit scores and get your credit reports from the three big credit agencies before you start looking for houses. It’s good to tackle those credit complications in the beginning and have a good score before you start applying for a mortgage.
Is Your Credit Score Good Enough to Buy a House?
A majority of lenders utilize the FICO model for assessing credit scores. It categorizes consumers according to the range between 300 to 850 points range, with the lower score meaning the higher risk to the lenders. Below are the scores and how lenders view them:
800-850 – Excellent
740-799 – Very Good
670-739 – Good
580-669 – Fair
Below 579 – Poor
However, it’s dependent upon the lender to decide the score limit a borrower should have to be able to qualify for the lowest interest rate. Remember, even a few points can impact your monthly payments by hundreds of dollars.
How Your Credit Score Affects Your Mortgage’s Interest Rates and Payments?
- If your score changes to 760-850, you could save an extra $86,672
- If your score changes to 700-759, you could save an extra $75,030
- If your score changes to 680-699, you could save an extra $65,636
- If your score changes to 660-679, you could save an extra $54,146
- If your score changes to 640-659, you could save an extra $30,638
According to Bruce McClary, spokesman for the National Foundation for Credit Counseling “People are aware of their credit score, however, is struggling to understand what that means in terms of what they qualify for.”
Is it Possible to Get a Mortgage with a Low Credit Score?
The answer is yes. However, you will get a higher interest rate with low credit scores; thus, you’ll end up with a higher monthly payment. If your credit score is low, lenders may be stricter about other aspects of your finances.
Remember, credit requirements may differ from one lender to another. If your credit score is low, it’s better to check with several lenders to find the one who offers you better rates with your current score.
Below is the list for minimum credit score requirements for several types of loans:
For conventional loans, most lenders will take a credit score as low as 620. However, a few lenders might require additional things like lowering outstanding debt.
Federal Housing Administration (FHA) loans:
FHA provides guarantees on the loans for the borrowers who have a less-than-ideal credit score and low-down payments. If you have a credit score of 500-579, you can apply for FHA home loan with a 10% down payment. If you have a credit score of 580 or higher, you can avail FHA’s maximum financing of 3.5% down.
U.S. Department of Veterans Affairs provides backup to VA loans. Active and veteran military personnel, along with their families, can obtain these loans. Many lenders need a minimum credit score of 620 for VA loans; however, the government doesn’t have a minimum score requirement to qualify for VA loans.
USDA loan program is backed up by The U.S. Department of Agriculture, and these loans are offered to borrowers with low- to moderate-income to buy a home in a rural area. A minimum credit score of 640 is required to be able to qualify for USDA loans. In some cases, USDA lenders may accept a lower score with extra scrutiny of a borrower’s credit.
A jumbo loan, also known as a jumbo mortgage, is a type of financing that exceeds the limits set by the Federal Housing Finance Agency (FHFA). Jumbo loans are considered riskier for lenders because these loans aren’t guaranteed by Fannie and Freddie, meaning the lender is not protected from losses if a borrower defaults. Thus these are hardest to qualify for especially if you have a poor score. A minimum of 720 or higher score is required by most lenders to be eligible for this type of loan.
How to Increase Your Credit Score
In case you don’t have a good credit score, you still have options. Try postponing the idea of buying a home and work on increasing your score, instead of agreeing to higher mortgage interest rates. Below are some tips to help in improving your score:
- Pay all of your bills on time
- Eliminate debt and keep balances low on credit cards and other revolving credit
- Apply for and open new credit account only if they are necessary
- Refrain from closing unused credit cards
- Don’t apply for too much new credit, resulting in multiple inquiries
- Dispute any inaccuracies on your credit reports
- When your credit has improved, rate-shop within a 30-day window.
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