When you’re going to take out a mortgage, there are many questions which you are going to have, especially if you are a first-time buyer. You may be asking yourself a lot of questions: How does my credit score affect my mortgage rate? How much credit score is required to buy a house? What can I do to improve my loan options?
All of these questions are crucial to understanding the borrowing process, improving your chances of getting a loan approved, ensuring you get a loan approved, and ensuring you get the best rates and lowest cost possible.
What is a credit score?
Your credit score is a numerical rating assessed by one of the national credit bureaus which gives a snapshot of your financial borrowing history to the lenders. In other words, these credit companies look at your past borrowing habits, how much debt you have and any other factors and then gauge how reliable you are when it comes to paying back the borrowed money.
If you have bankruptcies, late payments, or other past credit issues, you will have a lower score. If you haven’t borrowed much money in the past, you will have a lower score as the credit bureaus just have little to no information for making a proper assessment. These credit scores and then utilized industry-wide by lenders for loan approvals and interest rates.
The next question that arrives in our mind is what is a good score for a mortgage.
What is a good credit score?
While the ultimate decision is done by the individual lender but there are some general industry standards across the board in deciding “what is a good credit score?”
The point of views of David DiNatale in having a good credit score for a mortgage are as follows:
David DiNatale Esq., president of Capital Funding Financial LLC, said: “An individual’s credit score is critical to qualifying for a mortgage as it provides a track record and quantifiable data correlation to an individual’s ability to pay its debts on time. Generally, a 640 or better score is required to qualify for a conventional loan with a 580 or better credit score to qualify for FHA financing.
DiNatale said: As counsel for a mortgage company and family office fund, we use the credit score as a factor to assess the borrower’s ability to pay the loan on time. The higher the score, the less risk we assess with the loan and allow for a lower down payment. The lower the score, the more risk we assess with the loan and require a higher down payment to offset that risk.
How can my mortgage rate affect my credit score?
Your credit score lets lenders know how much risk they are taking on for your home purchase by extending financing to you. The basic principle of finance says that the riskier the investment, the more return you should be getting.
If you’re someone who does not have a history of good borrowing practices or you have done some mistakes in the past on your credit report, the lender will be taking a bigger risk in approving a home loan for you.
This greater risk means that the lender is going to need to see a bigger return on their investment. Since lenders profit from the interest you pay on your loan, you can expect to see a higher mortgage interest rate with a lower credit score.
Mortgage options for less than good credit
If you have less than good credit, it means you are a riskier investment for lenders. However, it does not mean that they won’t do business with you. There are mortgage options available for those with less than stellar credit or for people who lack an extensive credit score history. Federal Housing Administration (FHA0 loans are available for people with lower credit scores.
How to have a good credit score?
Let’s discuss “how to have a good credit score?” To have a good credit score, searching for a lender that will work with a low credit score is the only way. Buyers who are not in a time crunch can focus on improving their credit scores, which will open up new possibilities for the approval of the loan and the potential for better interest rates.
Your credit score plays an important role in deciding the types of loans you can get, the money you are approved for and the interest rate you will be charged on your loan. The final decision on these factors will always be up to the lender but understanding your options can help to make the process go smoothly. Those with less than a great credit may need to shop around for approval, but many mortgage lenders are willing to work with diverse financial situations.