It is important to understand that your credit score has a huge influence when you are applying for a home loan. By doing this, lenders are in a position to determine the probabilities of you repaying the loan in accordance to your credit score. The higher the score, the more likely you are to secure a home loan with a low-interest rate and flexible repayment terms. Well, to get the answer to this question, you would want to read the entire article and then some. Keep on reading to have more information.
What is a good credit score for homeownership? Today, most lenders require that you have a credit score of at least 620-640 for you to be approved to borrow money in the form of a mortgage. However, it is not advantageous to target only the minimum credit score that is required. Your credit rating also determines the interest rate that you will be charged and it works in such a way that the higher the credit rating, the lower the interest rate. While every lender has their own lending standards, here is a general overview of the credit scores preferred for home loans:While every lender has their own lending standards, here is a general overview of the credit scores preferred for home loans:
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620-659: FHA: While you can get a loan with only 35% down, the interest rate will be high.
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660-720: In general, most lenders consider borrowers with this credit score bracket to be good to excellent. You can still get low down payment conventional loans and get a very competitive interest rate. This is the credit score range that you would want to strive for and where most financial institutions consider a consumer to be a good credit risk.
721-850: Credit scores within this range enable borrowers to access the lowest obtainable interest rates and other loan benefits from a lender. It is in fact not particularly advantageous to have a score above 760.
How Lenders Utilize Credit Scores Besides the score, lenders use the whole credit report to assess the risk of extending credit to a particular client. They wish to know that you have paid your dues on time, and that your credit card balances are less than your credit limits. Late payments in the recent past or high balance on cards can mean higher risk even though score is above the required level. For the most part, just like it is dismissed as a conventional loan, the better your credit rating, the more you are considered for one of the low-down-payment conventional loan programs rather than an FHA or VA loan requiring mortgage insurance. Higher scores also provide better interest rates which saves thousands of dollars throughout the loan repayment period. It also matters how high or low your score is because even one point difference can change the loan terms.
What Affects A Credit Score To be able to qualify for affordable home financing it is wise to understand what can help or harm ones credit score. Your credit score is influenced by these key factors:Your credit score is influenced by these key factors:
Credit detail – Make your credit card and auto loan payments, student loan and other existing mortgage payments on time. This is the most important factor that affects your credit score.
Credit utilization – Having high balances on your credit cards and keeping the balances relatively close to your credit limits will not help your score even if you pay your bills on time. Reduce credit card balances to below 30 percent of the credit limit.
Credit utilization – Your credit score also benefits from a mixture of installment loans such as car and mortgage loans and credit cards.
Inquiries – Every time you apply for new credit it counts as an inquiry on your report, and your score will dip slightly if you have made many applications in a short time. Restrict loan requests before a mortgage loan request.
10 Tips to Boost Your Credit Rating If your score needs a boost, some effective ways to build your credit include:If your score needs a boost, some effective ways to build your credit include:
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Getting an account in another person with a good credit standing as an authorized user
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Asking for credit line increase when the balance on the accounts is relatively low
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Paying your bills on time by setting up periodic payments so that they are not missed.
- Minimizing the extent to which one opens new accounts 14-24 months before he/she requires a good credit.
It also aids in error rectification where you dispute and receive corrections on the same from the credit bureaus. If you don’t have any credit accounts active now, then you may have to go and open two new credit cards and then, after a year, use them properly.
Shopping for Mortgages the Right Way An essential guideline one has to follow when applying for a home loan is that it should be considered a ‘soft pull’ because while applying for a loan it is first checked off by the various companies using your credit report. This helps one to compare various mortgage rates of different lenders in a short time without affecting his or her credit score by frequent hard inquiries. Normally after choosing a lender they will then perform the full application which results in a hard inquiry.
In a nutshell, a credit score of at least 620 is enough to secure a mortgage, but you should aim for even higher FICO and VantageScores of 680 and above for better home loan programs and lower interest rates that reduce the cost of borrowing significantly throughout the life of the loan. Have good records of paying your bills, avoid applying for credit in the two years when you will need an excellent credit score, check for errors on your credit report that may be pulling down your score and keep your credit card balances low. By enhancing your credit first, you’ll position yourself well when it is time to purchase a house.
