Stated by an Austin credit repair company, a good credit score is vital to your financial freedom. It can help you get a low-interest mortgage for a new home or getting approved for a loan to get that new car. If your credit score isn’t where it should be, you’ll have a more difficult time getting a home loan than you think.
In this article, we look at why having a good credit score is essential for getting a home loan on good terms.
How A Credit Score Is Determined
Your credit score is a number based on specific information in your credit report. This number is what lenders use to determine whether you’re a good or bad risk to extend credit.
Here are the factors most agencies use to determine your score.
– Payment History Being on time or late on payments comprises 35% of your credit score.
– How Much You Owe The balances on your accounts are taken as a whole against your overall credit and comprises 30% of your score.
– Credit History How long you’ve had open, active accounts comprises 15% of your score.
– Types of Credit Reporting agencies like to see credit extended over a variety of forms such as loans, credit cards, mortgages, etc. This comprises 10% of your credit.
– New Credit Lastly, the time since you’ve opened any new accounts factors 10% to your overall score.
Credit Scores & Home Loans
When applying for a home loan, your bank looks first at your FICO score to see if you qualify for a loan. While that number is important, it’s not the only factor that goes into whether or not you get the loan; however, it is the most important.
Depending on the type of loan you’re going for, there will be a minimum score required. For example, according to Thelendersnetwork.com
The average minimum FICO scores by mortgage type are:
- FHA Loan — 580+ (500-579 is possible but unlikely)
- VA Loan — 620+ (some lenders require 580)
- USDA Loan — 640+
- FHA 203K Loan 620+
- Conventional Loan — 620+
If you’re a first time home buyer, you may think you don’t have a good enough score to get a mortgage, but it all depends on what type you go after. FHA loans are easy to get and have low score requirements, which is why many people refer to them as “bad credit home loans.”
Many banks will give an FHA loan to someone with a score as low as 500 and require a 10% down payment.
However, while you can get a home loan with bad credit, having a higher score ensures you get better terms and better interest rates.
According to Bankrate.com,
…borrowers with credit scores above 760 save as much as $193 in monthly payments for a 30-year, $200,000 mortgage compared to borrowers with scores ranging from 620 to 639. That adds up to $69,751 in interest payments over the life of the loan.
So, as you can see, you should do everything you can to get your credit score up before you go after a home loan. If your score isn’t where it should be, you can correct it quickly by making payments on time and pay down debt as soon as possible. It is always best to use your credit card as a debit card so you never find yourself in a situation with a high balance; which greatly affects your credit score.