What to Know About How Credit Scores Affect Mortgage Loans
Your credit score is an essential factor in securing mortgage loans, and it also affects the interest rate you must pay eventually. Plenty of potential buyers opt out of buying a house, or put it off indefinitely because they fear that their score would not be high enough.
Sometimes, these concerns are legitimate. However, there are also instances where people make decisions based on misconceptions about it. Let us look at the things borrowers often ask about credit scores and how these concerns impact the lending process.
How do lenders calculate my credit strength?
Lenders do not just analyze your credit score; it is one of three Cs of underwriting, the other two being capacity and collateral. Your capacity shows how likely you are to repay the loan, and it looks at things like your debt-to-income ratio, cash reserves, and employment status. Meanwhile, collateral describes the property you want to secure through a loan.
Issues with any of the three Cs can lead to a loan rejection. Furthermore, lenders will also look at your FICO or Fair Isaac Corporation score. They calculate these based on data from Experian, Equifax, and TransUnion, the three largest credit-reporting companies in the country.
Your FICO score comes from your types of credit, age of credit history, inquiries made, outstanding debt, and payment history. The last two are the most significant factors in this score, so you could start with them when improving your standing.
Does a low score disqualify me from a loan?
A low credit score often means a higher risk for a company, so your home purchase or refinance could get rejected. Conversely, they could approve your loan but leave you with higher interest rates. Also, your credit score affects your PMI or private mortgage insurance. The PMI is a required amount when your down payment is 20 percent or less.
Although low credit scores do not mean that you are barred from buying a home, these additional charges and hiked up rates can cause steeper premiums over time. Sometimes, this is the best option for a family; speaking with an expert will help you learn if it is the one for you.
In what range should I keep my credit score?
Generally, a FICO score of 740 or better will allow you to access the best interest rates for your prospective home. Lenders who provide conventional financing often require a score of over 620, while government-backed programs need at least 600.
Whether through traditional or government-funded, some lenders offer loans to individuals with a score lower than 600. However, these often come with a larger down payment.
Becoming a homeowner is one of the best things you could do to support your family’s future. A home that you own outright can help your family build a comfortable life for generations. People who want to become homeowners sometimes defer their dreams because they are concerned that their credit score is too low. If this is the case for you, setting up a consultation with a broker or a mortgage professional can clarify any lingering questions you might have.
Be one step closer to your dream home when you partner with Move Mortgage. Our loan officers in Westminster, CO provide expert financial advice, crafting their plans for each client’s goals and situation. Set an appointment with one of our representatives today for more information.