Your home is more than where you hang your hat. It’s where memories are made—they are buildings that give you feelings of safety and security.
Whether you will be a first-time buyer or a seasoned mover, buying a new house is a big step in life. While there are many aspects that go into purchasing a house, one of the most important is your home loan. Without it, you won’t be able to pay for the house at all. However, your credit score actually determines what kind of home loan you qualify for -and even if you qualify for a home loan at all. Luckily for you, in this article, we will explain the credit score needed for a home loan.
What Credit Score Will Qualify You for a Home Loan?
How To Read Your Credit Score
You can request your score from a number of places, such as a credit reporting agency. Here’s how to understand your score:
- Excellent Credit: a score of 750 or higher
- Good Credit: a score between 660 and 749
- Fair Credit: a score between 620 and 659
- Bad Credit: anything below 619
What Credit Score Will Lenders Accept?
Basically, the answer depends on the lender. If your score drops below 660, however, lenders will start to see you as a potential risk. Some lenders might not give you a loan even if you have fair credit. On the other hand, other lenders might say that a score of 640 or 620 is where the line is drawn where they won’t approve you for a loan. If you have a bad credit score, you can expect to be turned down by most lenders. The credit score needed for a home loan doesn’t have to be excellent, but it needs to meet a lender’s requirements.
On the other hand, you could qualify for a subprime loan or receive a loan from the Federal Housing Administration (FHA), which is one of the only lenders who provide home loans for people with bad or fair credit. However, they have a minimum score of 580 to qualify for a low down payment advantage, which is only 3.5%. If your score is below 580, you are required to pay a 10% down payment to qualify for loans. If you have a fair or bad credit score, an FHA loan might be your only choice.
Does Your Credit Score Affect Interest Rates On Home Loans?
Yes! The difference between excellent credit and fair or bad credit can cost you tens of thousands of dollars over time. The lower your score, the higher the interest rates.
For example, according to “Home Loans with Bad Credit: What Credit Does For Your Payment”, if you have a home loan amount of $300,000 and an excellent credit score of 740, you qualify for the lowest interest rates possible. Let’s say your interest rate is 4.31% and your monthly payment is $1,487. One late payment can drop your credit score up to 100 points, so say one late payment drops your credit score to 690.
Lenders might see you as a risk and raise your interest rate to 4.71%, which adds about $70 to your monthly bill. It may not seem like much, but over the course of your mortgage, you will ultimately pay $25,560 more than if you made the payment on time! Likewise, if your score was just 20 points lower at 670, the added cost would come to $39,600!
In the end, your credit score has a huge impact on the terms and conditions of the loans you receive. The difference of a few points on your score could cost you tens of thousands of dollars.
Should You Improve Your Score Before Taking Out a Home Loan?
Even if you have a credit score needed for a home loan, it is always a good idea to improve your score before taking out a loan. The lower your score, the more money you will pay and the harder it will be to get out of debt. However, if you can prove to lenders that you are trustworthy by upping your score, you will qualify for better terms and conditions and lower interest rates. Try improving your score before taking out a home loan and save yourself thousands of dollars over the course of your mortgage repayment!
Easily Improve Your Credit Score Today!
Though it might seem daunting to improve your score, it really isn’t too hard. For one, read about the ways you can improve your credit score in as little as thirty days. If you happen to have bad credit, you can also contact a company like Go Clean Credit, who helps people restore their scores. By taking action now, you can start improving your credit score today, ensuring that you receive the best deal possible when taking out a home loan!