This is a fact, and the importance of credit score cannot be overemphasized when one is applying for a mortgage. Credit scores are important to lenders because they are used to determine how creditworthy you are, that is, how likely you are to pay back the loan. Credit score determines the likelihood of getting approved and the higher the score, the better the chances of getting better deals. Here’s what you need to know about credit scores and mortgages:
Credit Score Required to Secure Mortgage
Conventional mortgages can be described as having various specifications such as a minimum credit score of 620. But again, the higher the score, the better it is in this case. Here are some general credit score guidelines for mortgages:
- 620-639: For an FHA loan, you may be eligible for a higher rate of interest, or you may be required to pay more for a down payment.
- 640-699: Labeled as “fair” credit by the credit bureaus. You will be eligible for most traditional loans and financing but can’t expect the best terms or rates.
- 700-759: “Good” credit. They can also qualify for conventional loans that come with favorable interest rates.
- 760+: The “Excellent” credit qualifies you to pay for the lowest rate of interest possible.
Eric further asserted that a credit score below 620 implies that one cannot qualify for most mortgages without a cosigner or other forms of credit guarantee. Subprime mortgage loans are those loans that are provided to borrowers, who have a poor credit history and rating, and these loans have higher rates of interest and other tougher conditions for the borrowers to qualify for.
Why Credit Score Is Important When Searching For Mortgage Rates
A credit score refers to the credit rating of an individual and the interest rate on a loan is the lower, the better the credit score of the borrower is. For instance, on the 30-year fixed mortgage starting at $250,000, a client with a FICO score of 760+ can be charged with a rate of 3.5%. However, while a score above 640 would attract a rate of less than 5%, a score below 640 would attract a rate of 5% or above. In other words, the difference in the monthly payments is slightly over $200 in favor of the banker and way less for the borrower with the lower credit rating.
The state of your credit also can influence the likelihood of your ability to secure a low down payment mortgage. FHA/VA loans along with conventional 97 and Home Ready loans have a minimum credit score of 620. VA loans require a credit score of 660 or above, and FHA loans require a credit score of at least 580. Governor-established or non-profit organizations such as state housing agencies also check the credit scores of the applicants for down payments.
Lender Evaluation of Your Credit Report – How Does it Happen?
Mortgage providers will go to an individual’s credit report to look for any signs of irregularities. Here are the key factors of your credit report they analyze:
- Payment history: Is it true that you have continually settled past credit accounts on time? Payments much later than due dates affect scores hugely.
- Credit utilization: This determines the extent to which you are utilizing the credit limits you have been availed by various credit card companies. It is advisable to keep the utilization at a low figure, normally less than 30%.
- Credit age/length: Payment history is another factor that is preferred for a long duration of positive payment history years.
- Credit mix: Lenders like to see you managing different roles of credits like credit cards, auto loans, student loans, etc This shows responsible handling of the accounts and less risk from your end.
- New credit checks: However, immediate application of multiple new credit accounts before applying for a mortgage will reduce the score slightly.
Some ideas that can help in the process of enhancing the credit score to get a mortgage.
If you have a low credit score, it is advisable to try and build it up before you apply for a home loan. Here are some smart strategies:
- Ensure all bills are paid without delay – even paying a day or two behind causes complications.
- Avoid utilization rates above 30 percent by using only 30 percent of the available credit.
- Reduced credit applications in the run-up to the mortgage application period.
- Check and correct any mistakes regarding your credit reports.
- It is possible to open an account in another person’s old, credit-worthy account and become authorized.
- It is recommended to take out a credit-builder loan to have a flow of positive payments.
In the case of credit repair, it is advisable to begin between 6 to 12 months before you make your home purchase. It is possible to get a low interest rate and flexible credit requirements when the credit score is 720 or above.
The Bottom Line
It is a fact that credit score determines mortgage eligibility, and the interest rates and fees that you are charged. The scores below are 620 and are rejected by most lenders while scores of 760+ make you win the lowest possible interest rate. It is advisable to keep a keen eye on credit health in the years or months preceding your mortgage application and this can save you several thousands throughout the life of your mortgage.