Every potential homebuyer dreams of the day they’ll finally get the symbol of independence, security and prosperity: the key to the front door of their new home. Whether you’re applying for a mortgage to move into a new home or you need a first time mortgage to help buy your first-ever home, there’s a lot that can go into getting the keys and moving in. Before you get that key, there’s another key you need to master -- your credit score.
The most influential factor of your mortgage interest rate is your credit score.
Can I qualify for a mortgage with my current credit score? The answer may be yes, but having a so-so score could cost you more.
The higher your credit score, the lower the interest rate on your mortgage. A credit score of 740 or higher qualifies for the best interest rates from most lenders. The general minimum requirement for a conventional loan is a credit score of 620. You may also be able to get an FHA mortgage with a score as low as 580. (An FHA loan is insured by the Federal Housing Administration. The borrower on a FHA loan pays for the insurance, which protects the lender if the borrower doesn’t make their payments.)
A poor credit score can mean:
- you pay a higher interest rate
- you may be required to put down a larger down payment;
- your application could be declined.
Your credit score will also affect the loan fees you pay.
Loan-level price adjustments, or LLPAs, are fees charged by Fannie Mae and Freddie Mac, the two government- controlled entities that purchase mortgages from lenders. These price adjustments are added costs to the loan and vary based on your credit score. The borrower has the option to roll the added cost into the rate or pay these costs at closing. Either way, there are benefits to having the highest credit score you can achieve.
Private Mortgage Insurance (PMI) is also tiered by your credit score and loan to value.
If the down payment you are able to make is less than 20% of the purchase price of your new home, you will need to pay private mortgage insurance. Once again, your credit score comes into play. The lower your credit score, the higher your monthly insurance premium.
Besides PMI, you will pay more for homeowners’ insurance to protect your new home if you have a low credit score. Insurance companies consider you a higher risk to file a claim as your credit score drops.
Before you buy, boost your credit score!
There are no simple tricks to bump your credit score in advance of a mortgage. You need to develop a 6- to 12-month plan to boost your credit score before getting your mortgage by making sound financial decisions.
Demonstrate to lenders that you can use credit responsibly, and your score will increase.
One of the biggest drags on a credit score is percentage of utilized debt.
Outstanding loans such as car loans or mortgage payments do not make you a higher risk and will not disqualify you, but lenders will look at your revolving lines of credit and the balances carried on these loans. If you continue to carry a higher balance and only make the minimum payments, this is a sign that you may have spread yourself too thin.
Don’t close out old credit accounts.
In general, the longer credit history you have with good records, the higher your credit score will be. That’s why it’s important to maintain old credit card account lines.
Credit inquiries can also affect your credit score.
Don’t apply for multiple credit accounts before you plan to buy a finance your home. This will generate a credit inquiry as you authorize prospective lenders to receive a copy of your credit report from a credit bureau. A large number of inquiries can mean a greater risk.
Credit inquiries can also decrease your credit score. For most people, one additional credit inquiry will take less than five points off their score. Depending on the current credit score and number of inquiries, this may decrease the credit score significantly.
If your credit score is low and there’s little more you can do about it, you may need to take other steps to get a better position on a loan. You might try boosting your down payment or shopping for less expensive houses, so you’re borrowing a smaller sum of money.
If your debt is a serious problem, perhaps moving into a new house isn’t a good short-term priority. Focus instead on paying off debt and saving up for a down payment. This can keep you from getting stuck with a house payment you can’t afford before you’re ready for it.
Finding the right mortgage can be as difficult as finding the right house. If you have questions contact us and we can show you affordable mortgage programs and help you figure out just how much mortgage you can afford.
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