We all know that our credit scores are important when it comes to taking out any kind of loan, and mortgages are a prime example. Your credit score will impact the type of home loan you may be able to get as well as the interest rate on the loan. Creditors want reassurance that you’ll be able to repay the loan.
The Higher, The Better
Before you even begin looking at buying a house, you’ll need to figure out how much you can afford to spend. It’s essential to remember it isn’t just the cost of the home that you need to worry about, but also the interest rate you’ll be paying. You’ll want to shop around a bit for a lender to ensure you get the best deal on your interest rate, but to do this, you have to rely on your credit score. Your credit score allows lenders to determine the amount of loan you qualify for and at what interest rate. You should check your credit score approximately six months before starting your lender search. That will give you enough time to fix any errors or issues. If you want a good interest rate, you’ll need to have a high credit rating. A few tenths of a percent may not seem like much, but over the course of a 30-year-fix-rate mortgage it will add up. According to Bankrate, “Generally, a [FICO] score of 800 or higher is considered exceptional; 740 to 799 is very good; 670 to 739 is good; 580 to 669 is fair; and 579 or lower is poor.”
Types of Loans
Conventional loans are offered through private lenders such as mortgage companies, credit unions, and commercial banks. They may be guaranteed by government-sponsored agencies like Fannie Mae and Freddie Mac. Lenders of conventional loans will often accept a credit score as low as 620; however, some may have more requirements for a rating on the lower end.
Federal Housing Administration (FHA) loans are guaranteed by the federal government. If you have low credit and not much money for a down payment, this may be the type of loan for you. Scores between 500 and 579 are potentially eligible for an FHA loan with 10% down while those with a 580 or higher can be eligible for 3.5% down.
If you’re looking to buy a home in a rural area, you may want to consider a USDA loan. These loans are backed by the U.S. Department of Agriculture. The typical minimum credit score for this type of loan is 640.
The U.S. Department of Veterans Affairs offers active or veteran service members VA Loans. Though the government doesn’t have a minimum credit score requirement, many lenders require at least a 620.
Though your credit score is one of the main factors that lenders will consider when determining your eligibility for a loan, there are a few other things they factor in their calculations. Other factors include your credit report and credit history, current debts, current savings, total assets, and your current income.
Improving Bad Credit
If your credit isn’t the greatest, you may need to reconsider purchasing a home at this time. It may be better to hold off and improve your credit score to be eligible for a better interest rate down the road. Your credit score can be improved over time by paying down credit card balances and paying all of your bills on time. You should also avoid raking up any more debt or opening up any new lines of credit.