Are you interested in living the American dream and purchasing a home? Banking institutions and lenders want to know a person's credit score before lending money for major loans, including home mortgages.
Know how credit score and credit history can impact the home buying process and how potential applicants can get started on improving their credit score today.
Why Does Credit Score Matter?
Homeowners should be aware that a credit score can be a main factor in determining eligibility for various types of home mortgage products, whether they're in areas like Franklin or elsewhere. An applicant's credit score shows a lender a history of making payments, current debt and the approximate level of risk that they may assume when approving an applicant for a specific loan mortgage products, as those applicants with poor credit scores and a high debt-to-income ratio may be more likely to default on a home mortgage loan. Individuals applying for a conventional home mortgage with a poor credit score, if accepted, may have higher interest rates associated with the mortgage loan. This translates to a homeowner with a lower credit score having to pay more money back to a lender than one with a high score over the lifetime of a loan.
What Can a Homeowner with a Poor Credit Score Do?
When a homeowner does not know their credit score and thinks that they may not have a good credit score, it makes sense to get more information before applying for a major loan. Request free credit score reports, review them for any inaccuracies and learn more about one's state of credit. It is possible to improve a credit score and report any inaccuracies. It often takes a short time to see a credit score increase and see inaccuracies removed. Look at the credit reports by all three credit agencies as information provided may vary. When attempting to apply for a mortgage loan product, do not take out additional lines of credit or attempt to apply for a major loan. Doing so may temporarily affect one's credit score.
Homeowners that are not able to qualify for a conventional loan should be aware that other types of mortgage loan products are available. However, an approved applicant of another loan product may still have to deal with high interest rates. This is a major reason to review and make efforts to improve one's credit score before applying for a home mortgage loan.
What Parts of a Credit History Are Important?
A credit report provides a significant amount of history on an individual over the last 7 years. A lender wants to know more about an applicant's:
- Payment history
- Debt owed
- Length of credit history
- New credit
- Types of credit used
A person's debt and payment history are the most important areas for a lender to review. Payment history may include any delinquent accounts, negative public records and payments made on accounts as agreed. There are many factors taken into account when a credit score is determined.
Credit Score Requirements For Different Home Loans
Different home loans have different credit score requirements. Often, the home buyer's credit score is one of the factors that gets taken into consideration when the home buyer is trying to decide which type of home loan is right for them.
Many home loans have different minimum credit score requirements based on how much the buyer can put toward the down payment. Home buyers with a lower credit score may need to put down a larger down payment in order to secure the loan.
For example, an FHA loan requires a minimum credit score of 580 for a home buyer who will be putting down a 3.5% home loan. If the buyer has a credit score lower than 580, the buyer may need to put down a larger down payment of 10%.
Minimum down payments for other types of loans include:
- VA loan: 580-620
- Conventional loan: 620
- FHA 203K loan: 620
- USDA loan: 640
Sometimes the minimum down payment will depend on the lender, in addition to the type of loan. Buyers who have a low credit score and who aren't sure if they qualify for a mortgage can find out by contacting different lenders and explaining their situation. A home buyer who has a low credit score and a very small amount to put toward a down payment may need to wait until they've either improved their credit score, or saved more money.
The Benefits of a Good to Excellent Credit Score
Borrowers with a history of excellent credit and with lengthy credit histories can benefit from being offered low interest rates on home mortgages, making buying and paying off a home more affordable. However, credit is not fixed and changes over time. Individuals can do much to pay down existing debt and improve a credit score to make it more likely to be approved for a home mortgage. Down payments of 20 percent or more may also help improve chances of being approved for a loan, when factoring in less than excellent credit scores.
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