To finance a home, you must have a reasonable credit score — but, there are many other dynamics that factor into whether you get approved. Other credit factors, like your payment history, outstanding debts and available credit, will play a major role when qualifying for a mortgage.
It’s important that you understand not only how your credit score affects your approval chances, but also how it influences the terms of your loan. Financing a home is a lifelong investment and you do not want to be indebted for the rest of your life. As your credit score can significantly influence your monthly costs, it’s time to educate yourself!
The details found below will give you good guidance; at the end of this post, you will know whether you can qualify now and if waiting is a better option.
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If you require financing to buy a home, getting approved with a lower credit rating will be a challenge. But, that does not mean that it will be impossible to do. There are lenders that specialize in dealing with poor credit borrowers — even for mortgages — but low credit home loans come at a premium.
You might want to consider increasing your credit rating before applying for a home loan. Otherwise, you can expect to pay a lot more than even someone with average credit; it’s also possible that your low credit score will cause your loan application to get turned down.
When applying for a mortgage, make sure to consider where to go for the loan. As a borrower with a low credit score, most banks will reject you on the spot as they typically have a minimal score that must be met to qualify. Meanwhile, credit union banks are more likely to look past your credit score issues and consider your qualifications based on your current debts and expenses, and your recurring incomes.
While there is not a minimal credit score needed for home loan approval, it’s true that someone with a low enough credit score will struggle to qualify for financing. It’s recommended that you have at least a 620 FICO score before you apply for a mortgage. With the appropriate finances behind you, there should be a fair number of lenders that will take you on with such a score.
It’s important to understand how much your debt, expenses and income can play a role in your ability to qualify for a mortgage. Someone with a 620 credit score could get approved, while another applicant with a 700 credit rating might get rejected, all because of their higher income status. This means you should not base your decision to apply for home financing by your credit score alone, but also your overall affordability — which is exactly what lenders look at, as your credit rating alone does not tell them much.
However, anyone looking to finance through a FHA loan (with 3.5% down) will need at least a 580 credit rating to qualify. If your credit rating is lower, a FHA loan could still be possible if you can manage at least a 10% down-payment.
Aside from your chances of approval, your credit score can also impact the cost and terms of your loan. It is important that you understand how much this can differ — after all, it could save you six figures in the long run!
To better demonstrate, take a look at this chart that compares mortgage costs by credit score. It includes statistics for FICO scores ranging from 620 to 850, as the vast majority of mortgage borrowers fall within this range — many with lower scores will turn to FHA financing instead.
The following numbers are accurate, assuming a $100,000 principle on a 30-year fixed-rate home loan.
|FICO Score||Interest Rate (APR)||Monthly Cost||Total Interest|
|620 – 639||5.121%||$544||$95,927|
|640 – 659||4.575%||$511||$84,014|
|660 – 679||4.145%||$486||$74,892|
|680 – 699||3.931%||$473||$70,441|
|700 – 759||3.754%||$463||$66,803|
|760 – 850||3.532%||$451||$62,300|
As you can see, it might make sense to build up your credit score before applying for a home loan. It might even take you as little as a year or two before you transition from average or poor to great or excellent borrowing status. While you might be in a rush to buy your new home, a bit of patience could go a long way. You might consider refinancing for a better rate later, but your mortgage debt might be too large to secure the same level of savings.
If you have not done so already, you should obtain your FICO score now — forget any other metrics, this is what a will analyze when processing your loan application.
Next, take your FICO score and see where it positions you on our chart. This will indicate what you can expect if you were to apply for home financing right now. Compare it with what you could expect if you were to increase your score before you apply. The lower your score, the more upward it can move; if you can save a substantial amount on interest in the long run, you should definitely do so.
You are looking to buy a new home, so it’s understandable if you do not want to wait a few years for your credit score to improve. That said, a little bit of patience can go a long way — and each of the points below could contribute towards a sizable savings in the long haul.
Back in 2013, estimates from the FTC suggested that 1 in 20 Americans were shafted 20 points or more due to credit report errors.. Even better, 1 in 250 consumers with credit report errors will see a credit score shift of more than 100 points once the errors are removed.
You can request your free credit report from each of the three credit bureaus now, through AnnualCreditReport.com, to see if there are any errors to fix. If you find any, notify the respective bureau to inform them of the errors. They will then research your dispute and see if your claims are provable, or if further information is needed.
The three major credit report bureaus make it easy for you to dispute credit report errors online. If you find that there are errors on your credit report, go to the bureau(s) that listed those errors and file a dispute. You can find the credit report error dispute form at: Equifax, Experian, and TransUnion.
By now, you probably know that your debt-to-credit ratio can have a significant impact on your credit score calculation. This is the ratio that explains how much debt you are carrying compared to the amount of credit you have available. Also known as your credit utilization rate, this variable alone can make or break your chances of getting approved for a home loan.
You can lower your ratio by carrying less debt. Of course, that is not easy to accomplish as there’s a good chance you would pay off more debt if you could afford it. This is why it might be a better option to build more credit instead. By taking on greater amounts of credit availability, you will force the debt-to-credit ratio to work in your favor. If you can accomplish this through requesting limit increases from your current lenders, then that would be perfect.
The negative effects of applying for and obtaining new credit are lesser than the positive influence that the improved ratio will have. However, this is only feasible if you are able to wait six months to a year after obtaining your new credit account(s) to apply for a mortgage.
It’s possible to get debt in collections removed from your credit report. Contact the collection’s agency and make an offer on the condition that the debt gets marked as “paid as agreed” or deleted for good. If the company agrees, get the deal cemented with paperwork proof and await the changes to your credit score in the next few months.
There is also such thing as a “good-will adjustment,” which might be an option. Say you were an excellent borrower, someone who always made credit card payments on time, and then you fell on bad times and missed a payment or two. This does not mean that you are a bad borrower now, as it could even be a problem you had years ago.
The company you had the delinquency with might remove your incidental blemish if you ask. As a single late payment can result in as much as a 110-point drop for someone with excellent credit, this is a blemish you do not want on your report. Even if you just think you are going to be late for a payment, it’s best to let your creditor know as they might be more inclined to delay reporting the delinquency to the credit bureaus.
It will be a hard victory if you have late payments that are spread years apart and across various creditors. But, it’s definitely possible to reverse the damage of a one-time mistake — especially after a bit of time passes and it’s clear it was nothing more than a situation-based mishap.
If you go the FHA route, you do not have to worry so much about hitting a certain credit score to buy a house. You can currently finance a home through FHA with at least a 580 FICO score, so long as you have 3.5% down — even with a lower rating, you could qualify with a 10% down-payment. Further, even borrowers with previous bankruptcies and/or foreclosures can still qualify for a FHA low credit home loan.
While this sounds great, you must first know the following:
If you do not require FHA financing, but you are considering it, take your standard mortgage cost and compare it with the estimated cost from FHA’s mortgage calculator. This will tell you which of the two will cost you less, both on a monthly basis and over the entire mortgage term.
For the most part, FHA financing is an ‘easy way out’ for those that feel like they have no other options. It allows you to qualify for financing, even if you do not have the best credit rating. While it might seem convenient, you should be weary about going this route — it might make more sense to either save a larger down-payment or work on your credit score, and then borrow through traditional financing avenues.
To get the best interest rate and terms, there are a few things you must remember before you apply for a home loan. Take each of these points into consideration to make sure that you do not make any costly mistakes.
Stay credit dormant. If you are financing a home, you do not want to make yourself look credit-hungry. Spend at least six months without inquiring about any new credit lines before you apply for a mortgage. If you need assistance to come up with the down-payment, then do so with an old credit account instead of applying for a new one.
Get pre-approved. Your mortgage pre-approval is a very important piece of paper — you will present it, along with your earnest money deposit and the contract of sale, when offering on a home. Make sure you apply for a mortgage pre-approval before shopping your local real estate market. You can request a pre-approval letter from various lenders, but make sure to keep track of any expiry dates.
Save up. It might sound obvious, but you should never underestimate the power of a large down-payment. This decreases your loan-to-value ratio, which results in a better borrowing rate and less interest paid throughout the mortgage term. This makes a substantial difference in interest premiums if you have a good, but not great credit score. It can also help your chances of getting approved in the first place.
Pay old medical debts. You might want to find out which FICO score your mortgage will use. If it is FICO Score 9, the most up-to-date calculation algorithm, then you could benefit from paying off your old medical debts. Specifically, you should repay any medical collection’s debts that exist. These would have triggered significant charge-offs if they went unpaid long enough, resulting in a hefty score drop. But, with FICO Score 9, repaying these medical collection’s debts would reverse the damage they caused to your credit score.
You should shop the mortgage market before leaving fate to do the rest. If you are not the perfect borrower on paper, but you are responsible, your results will vary depending on where you apply for a home loan. While you might get rejected for a mortgage from four out of five lenders, there’s still that fifth lender to try. As such, it’s sensible to get pre-approved through a few different home loan providers before giving up on getting a mortgage.
That said, anyone that gets rejected on a consistent basis should take some time to step back and re-focus. If the odds have worked that much against you, then there’s a good chance that you have to improve your affordability or your credit score. Under federal laws, home mortgage providers are required to supply denial letters stating the reason(s) behind your loan application getting rejected.
After you find out why you were rejected, you can re-position yourself.
Were you rejected due to a poor loan-to-value ratio?
This has become an all-too-common problem. Lenders are looking to lock up as little risk as possible, so they favor borrowers who are able to cover a considerable amount of equity. If you get pre-approved for home financing, it’s still possible that you will get rejected for the mortgage once you try to close the deal. The main reason for this would be what the lender considers to be a poor loan-to-value ratio.
Yet, your loan-to-value ratio can fluctuate a lot based on the appraiser you use. Even worse, real estate appraisers give all sorts of valuations and there could be a significant difference (think: 10-25% in the appraised values. This is why you might want to get a new appraisal, as it could improve your loan-to-value ratio.
You are not allowed to get a second appraisal done by a separate appraiser on the same house through the same lender. However, you do have the option to dispute the appraised amount that got your home loan rejected in the first place — while this could work, most of the time the re-calculation creates only a minor change.
By now, you should already have a good idea on how your credit score can affect your life. A quality rating means easy approval for almost all types of credit accounts, while a poor score will leave you relying on payday loan providers during a financial crisis. If you want to get a head, you need a good credit score — and if you want to buy a house, you really need a good credit score.
The Federal Housing Administration (FHA) will do the same thing, so long as you can meet their down-payment requirements. But, unless you are getting a killer deal on the property, you might find a whole lot more value in establishing terrific borrowing status before you take out such a large loan.
Elite Personal Finance has showed you how to qualify for a mortgage with almost any credit score. However, that does not mean that we recommend you use any of these ‘shortcut’ methods. A home loan can keep you in debt for 30 years. You must not just be careful, but also patient!
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