To finance a home, you must have a reasonable credit score, but many other dynamics 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 how your credit score affects your approval chances and how it influences your loan terms. 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 the right 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 challenging. But, that does not mean that it will be impossible to do. Some lenders 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 minimum 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 no minimum credit score needed for home loan approval, someone with a low enough credit score will indeed 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 a home financing on your credit score alone and 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 an FHA loan (with 3.5% down) will need at least a 580 credit rating to qualify. If your credit rating is lower, an FHA loan could still be possible if you can manage at least a 10% down payment.
Besides your chances of approval, your credit score can also impact your loan’s cost and terms. 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.
|620 – 639
|640 – 659
|660 – 679
|680 – 699
|700 – 759
|760 – 850
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 low 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 use it. 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 to improve your credit score. That said, a little bit of patience can go a long way, and each of the points below could contribute towards sizable savings in the long haul.
FTC reported 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 ratio 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 more significant amounts of credit availability, you will force the debt to credit ratio to work in your favor. If you can accomplish this by requesting limit increases from your current lenders, that would be perfect.
The negative effects of applying for and obtaining new credit are lesser than the improved ratio’s positive influence. However, this is only feasible if you can 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 agency and offer the condition that the debt is marked as “paid as agreed” or deleted for good. If the company agrees, get the deal cemented with paperwork proof and await your credit score changes in the next few months.
There is also such thing as a “goodwill 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 think you will 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 specific 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 a 3.5% down, you could qualify with a 10% down payment even with a lower rating. Further, even borrowers with previous bankruptcies and/or foreclosures can still qualify for an FHA low credit home loan.
While this sounds great, you have to know these things:
If you do not require FHA financing, but 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 monthly 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 wary 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, you must remember a few things before applying for a home loan. Take each of these points into consideration to make sure that you do not make any costly mistakes.
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, do so with an old credit account instead of applying for a new one.
Your mortgage preapproval 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.
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.
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 consistently should take some time to step back and refocus. 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 reposition yourself.
This has become an all too common problem. Lenders are looking to lock up as little risk as possible, so they favor borrowers who can 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 low 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 of 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 cannot 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 recalculation creates only a minor change.
By now, you should already have a good idea of how your credit score can affect your life. A quality rating means easy approval for almost all types of credit accounts, while a low score will leave you relying on payday loan providers during a financial crisis. If you want to get ahead, 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.