A lot of us think that that credit score, that end-all/a be-all number is really the deciding factor on whether or not we can get a loan. Any loan or for that matter be it a car loan, student loan, appliance loan, or financing just about anything, but that score, that mystical number, is really not the only deciding factor.
This is a big loan
A home loan is really one of the biggest and most important loans you’ll ever get. This is not just a $20,000 car loan or a $2000 refrigerator loan from Best Buy. We’re talking about hundreds of thousands of dollars and years if not decades of payments, so this is a big deal when it comes to your credit score, however, not having an 800 or 850 score doesn’t necessarily keep you out of the running for a good home loan. Surprisingly, even people with credit scores under 500 can get a home loan, albeit some different caveats and requirements are usually needed. So how does your credit score affect the ability to get a home loan?
When you walk into a bank, that bank provides you with the home loan they are offering. Here it is, take it or leave it, you must have a credit score of this, history of this, the income of this, and debt to income ratio of this. If not, you’re out on your luck. This is why I have such a passion for mortgage officers and loan officers. We don’t work for anyone bank so we have access to hundreds of banks, programs, and options for potential borrowers. We have access to loans that the typical hometown bank or credit union simply can’t get a hold of. Also, general laypeople can’t just look up any home loan and get the best deal without going through mortgage officer.
A Mortgage Officer is Probably the Way to Go
It does cost a little bit more in closing costs using a mortgage officer but this could save you thousands if not tens of thousands of dollars in the long run simply by getting the right loan.
But that credit score is still important. Along with a low debt to income ratio and strong financial history, you’ll need a fairly decent credit score for the lowest mortgage rates. Did you hear me, I said lowest mortgage rates, not the ability to get a loan. You might be able to get a home loan or refinance even with a lower credit score, but your rates and terms may not be as favorable.
Think of it this way, would you loan money to a friend who had a history of not paying people back or being late on their payments? Probably not. But, if you did, there’d probably be higher interest rate and protection on your part in case they default. Well, lenders are very similar. If someone has a high credit score, it shows that they’ve been good at paying their bills on time, keeping their debts low, and meeting their obligations financially. It makes lenders more likely to give you a loan because we know that you’re going to pay it back. So this credit score really is the basis for understanding how high of a risk you are. Even if you have a lot of debt but you are able to pay your bills on time every single month and have a strong history of doing so, there should be no reason you wouldn’t pay back a home loan.
How important is that score?
The credit score is probably one of the most important parts to qualify but it’s only one part. There are several factors when it comes to getting a home loan. We look at the history, income through tax statements, W-2s, or even bank statements, the longevity of employment, and a history of paying bills. All of these factors play into how big of a risk you really are. Even if you have a fairly high debt to income ratio, meaning that up to 50% of your income goes to paying debts – if you have a high enough income, a high enough credit score, and you’re faithful at making payments, you’re considered somewhat low risk.
20 Points Can Make a Difference
The lending industry usually adjusts the credit score in 20 point increments. You might see a slight difference from a 790 score to a 770 score. If you have a score of 760 or above, you are considered very low risk and that’s considered a high credit score. A 100 point difference can really affect your mortgage payment though. If you have a 700 score versus a 600 score, you could find yourself paying at least 1% or more in interest and having a higher payment by several hundred dollars. This is why it really pays to try to increase that credit score as much as possible.
Conventional loans do put a lot of emphasis on your credit score but for FHA (Federal Housing Administration) or VA loans, the focus isn’t on the credit score as much. You can have a credit score as low as 500 for certain government insured FHA mortgages and VA mortgages don’t require a minimum score at all. So again, it depends on the type of loan you’re going for. Jumbo loans require at least about a 700 or more and depending on where you are in the country, may require an even higher credit score.
So what can you do to increase your credit score quickly?
- Make sure that all of your payments are on time.
- Keep your spending to know more than 30% of your limit on credit cards and loans.
- Pay down any high balance credit cards
- Check and correct any errors on your credit report.
- Work with a credit counselor or lender to build your credit.
Often times just sitting down with a lender and discussing your needs and your current financial situation can give you a great step in the right direction. Depending on your score, you can apply for a home loan with a better rate in just a couple of months, six months, or within a year.
Yes, your credit score will affect your chances of getting a home loan but more than that it will affect your interest rate and terms. Give me a call today. Don’t let the fear of the unknown keep you from buying the home of your dreams. Let’s start somewhere together.