According to 2020 data from Experian.com, about 44 percent of homeowners in the United States have a mortgage. A mortgage is a consumer loan used to purchase a new home or borrow money against the value of a property you already own. Once approved by a lender, you are responsible for repaying the mortgage back each month with interest.
Although most lenders look at your debt-to-income and loan-to-value ratios, your credit score can also impact your potential mortgage options. Here’s how your credit score can affect available loans.
Excellent Credit (740+)
An excellent credit score can easily get you the lowest rates from a mortgage lender. When it comes to getting approved, a higher credit score can make the experience very easy, as well as provide you with a variety of lender options. In the long run, this can save you a lot of money and stress!
Excellent credit also gives you the option to contribute a smaller down payment. Yet the higher the down payment, the lower your rates will be.
Good Credit (700-739)
Having a good credit score can still give you more of an advantage when it comes to qualifying for a mortgage loan. Most lender programs look for scores of at least 640, making 700 and higher a quality score.
With a good credit score, you can qualify for a loan from many of the major mortgage programs including Federal Housing Administration (FHA), Veterans Affairs (VA), United States Department of Agriculture (USDA) and a Conventional loan.
Fair Credit (630-699)
Qualifying for a mortgage loan becomes more difficult with a fair credit score but is not impossible. With a lower score, you may have to pay a higher interest rate or contribute a larger down payment.
It is common for homebuyers with fair credit to qualify for a conventional mortgage loan but due to their “uncertain” financial situation, the lender may charge a higher interest rate on top of monthly payments.
Poor Credit (Below 629)
Even with a poor credit score, you can still manage to qualify for a mortgage loan. However, a much higher interest rate can be expected, making the loan more expensive overall. According to Freddie Mac, poor credit scores resulted in interest rates of almost 5 percent in November 2019.
To lower these rates, you have several options. Consider a co-signer to help give your application more promise. A cosigner is someone who agrees to pay back the loan you take out if you do not. Make sure this person is capable of taking on the responsibility before signing.
How to Build Your Score
There are many ways for you to improve your credit score over time. Here are a few things to consider:
- Pay down credit card balances
- Always make payments on time
- Pay off any collections
- Catch up on past-due bills
- Pay more than the minimum monthly payment
Are you ready to apply for a mortgage and move into a new house? Explore our active communities today!