Your credit score is an important factor that can make it or break it when it comes to applying for a mortgage. Having a higher credit score increases the chances of approval with a lower interest rate. With a lower interest rate, you can save more money on monthly mortgage payments.
Let’s start with an example. Jordan is paying an interest rate of 4% and Daniel is paying an interest rate of 3.5%. This is going to make a difference of $20,427 on a $200,000 mortgage over a 30-year term. With an interest rate of 3.5%, Daniel is going to save $20,427.
So, before you start looking for a house, get your credit report and do your best to make improvements in your credit score.
What Is The Best Credit Score For Buying A House?
Most lenders trust the FICO scoring model. Depending on how you are managing your finances, your credit score can be from 300 to 850. A higher score means less risk. This is what a lender always looks for. A borrower who can make payments on time. A credit score less than or equal to 579 is poor, 580 to 669 is fair, 670 to 739 is good, 740 to 799 is very good and above 800 is exceptional.
A bad credit score can lead to rejection. However, you can get approval by reducing the overall amount you are planning to borrow or by having a co-signer. For most borrowers, a credit score above 760 is the best.
Check the following table for your monthly payments and total interest on a 30-year loan of $200,000.
|FICO Score||APR||Monthly Payment||Total Interest|
- For a score from 700 to 759, you will be paying an extra $8,934.
- For a score from 680 to 699, you will be paying an extra $16,150.
- For a score from 660 to 679, you will be paying an extra $24,985.
- For a score from 640 to 659, you will be paying an extra $43,094.
- For a score from 620 to 639, you will be paying an extra $66,754.
Low Credit Score and Mortgage
You can get a mortgage even when you have a low credit score. However, you will have to pay higher monthly payments and a higher interest rate. Lenders will also consider other aspects such as how much debt you have. Keep in mind that not all lenders have the same credit requirements. So, while you are working on your credit score, also try to shop around with multiple lenders.
Let’s see the different loan types and their respective minimum credit scores.
|Loan Type||Credit Score|
|FHA Loans||500 to 579|
How To Increase Credit Score?
Still, there are options available to you if you don’t have a good credit score. So, you should consider postponing homeownership and look for the best credit repair services. You can increase your credit score on your own. However, to increase credit score fast, you should work with the best credit repair services provider. Here are some tips for you.
Get your credit score, review it for errors and remove them by writing to Experian, Equifax and TransUnion. Don’t forget to include supporting documents.
Having a credit utilization ratio below 30% really helps.
Pay all of your bills on time. 35% of your credit score is made up of your payment history. Your credit report is going to reflect late payments for seven years.
Even when paid off, avoid closing your older credit lines as this will raise your credit utilization ratio.
Your credit score is not increased overnight. You have to avail the best credit repair services. You can also take the steps credit repair companies take to increase credit score. You can find a credit repair company. However, don’t forget to learn about your rights. Go through the Credit Repair Organizations Act and find the right credit repair company.