Credit Score and Mortgage
Issues When Buying a Home
When it comes to buying a home, you need to realize how your credit score and mortgage rate will be connected. Not only will your credit score affect how big of a mortgage you can qualify for, but it will also affect how much you'll pay each month. Read on to find out more.
Credit Scores and Home Buying
If you've begun the process of purchasing your own home, you're probably beginning to realize that your credit score can absolutely make the difference between being able to buy that dream house you've had your eye on, or having to settle for the fixer-upper down the street. In some cases, a potential buyer's credit score can even exclude them from owning a home at all. But what you may not realize is that your credit score can impact your monthly mortgage payment, sometimes to the tune of hundreds of dollars, making it critically important to know your score before you start house hunting.
Your credit score is a rating of how good or bad your credit is, based on the information contained in your credit report (which lists your credit history, including loans, mortgages, credit cards, etc). Scores range from 300 to 850, and can be affected negatively by:
- Bankruptcy
- Outstanding (unpaid) debts
- Late payments
- Credit card balances near the credit limit on those cards
- Liens (both outstanding and paid)
Low Credit Score Home Loans
About 25% of the U.S. population currently has sub-par credit, which is a score under 660, and generally cannot obtain a loan through most traditional lending means. However, buyers who fall into this category can apply for a government loan program like a Federal Housing Administration (FHA) loan, a USDA loan, or, if they are veterans, a VA home loan. These programs don't loan directly to consumers but instead offer guaranties to lending institutions. These guaranties lower the risk of default to the lender and allow lenders to approve borrowers that they may otherwise have to pass by.
If you do have poor credit, another way to get financing is to improve your credit scores before you even apply for a loan. Take an extra year and make a concerted effort to make all your debt payments on time. This action alone can increase your score by as much as 50 points, and that amount of increase can sometimes make all the difference. Reducing your debt is another quick way to improve your score, and even a few extra hundred dollars towards your debt payments can have a beneficial effect.
Regardless of your credit standing, it's a good idea to review your credit report before you begin to apply for loans. You're entitled to view your report once a year for free, and your own review will have no impact at all on your score.
Resources:
Veterans Guide to Saving on Housing Costs
Chris Birk, a former journalist and college professor, writes about governmental loans and the mortgage industry for a host of publications, including Mortgages Unzipped and Bigger Pockets.
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