Thinking of Buying a Home? Let’s Talk About Your Credit Score
Whether you like it or not, your credit score does have a big impact on your ability to purchase a home at an affordable interest rate, and can even affect your potential to qualify for a mortgage in the first place.
If you’re considering buying a house, well… ever, then you’ll definitely want to do everything you can to make sure your credit score is up to snuff. Let’s take a look at how your credit score is calculated.
What’s in a Number?
Your credit score is one if the key metrics that lenders use to evaluate your viability as a mortgage borrower. Your credit score is based on several factors, and lenders make assumptions based on those factors, about whether or not you’re a good risk for lending. These factors include:
· Your payment history – if you pay your credit cards late, then you may be more likely to have trouble making mortgage payments on time.
· How much you owe – if you’re saddled with a large amount of debt, then you may have difficulty affording a monthly mortgage payment.
· The length of your credit history – lenders prefer borrowers with a solid and long-running track record of responsible credit management.
· New credit applications – the more new credit you apply for at the same time you are trying to get a mortgage, the more concern the lender will have. So hold off on applying for that new credit card or auto loan until after you make your home purchase.
· The diversity of your credit portfolio – ideally, a lender likes to see that you have a variety of credit accounts in your name, including revolving (credit card, line of credit) and installment (e.g. auto loans, student loans) accounts.
How Low Credit Affects Your Mortgage
If your credit score is between 501 and 650, then you have low credit. 650 may sound high to you, but not to a lender. Of course, that’s a pretty big range, and the closer you are to the upper end, the more options you’ll have.
With a lower credit score, there are still plenty of great options available, including FHA loan, Veteran Administration loans (VA loans), and USDA loans (for properties in rural areas). Contrary to popular belief, FHA loans aren’t just for first-time homebuyers. You can take advantage of this government-backed loan program, even if you’ve purchased a home in the past.
If you can bring your score above 620, then you may be able to qualify for a conventional mortgage, which may in turn give you a lower interest rate, and more buying power. Remember – the more money you have to put down, the better your interest rate will ultimately be.
How Medium Credit Affects Your Mortgage
With a FICO score between 651 and 699, you have medium credit. Just for reference, the average FICO score in 2015 was 695, so you’re in pretty good company in this range.
Assuming your finances are in order and you’re not struggling under mountains of credit card debt, you should be able to qualify for some pretty nice interest rates, especially in the current economic climate.
How High Credit Affects Your Mortgage
If your credit score is above 700, then you’re doing quite well at managing your debts. Above 800, and your score is considered excellent. To qualify for the absolute lowest interest rates available, you’ll need a credit score of at least 760. At the moment, the 760-850 FICO score range may qualify you for the lowest interest rates available.
Get While the Getting Is Good
To learn more about your options and interest rates, contact a professional mortgage specialist who can evaluate your options, and help find the best deal for you.
With the Federal Reserve hinting at an impending federal funds rate hike, you may want to take advantage of our current low interest rates sooner rather than later.
Learn even more about this topic in our special section on Mortgage Information now.
[Photo Via: ProfessorsHouse]