If you are thinking about buying a house, you need to be aware of how your credit score will affect the process. Having a good credit score is imperative, if you want an excellent interest rate. But what if you don’t have a good credit score? Can you still buy a house? The answer is yes; however, the higher your credit score, the better the chances are you will be approved, not to mention the possibilities for receiving a lower interest rate. Therefore, you are probably wondering “how does your credit score affect your mortgage?” That’s a legitimate question and knowing how your credit score will affect your mortgage rate will help you prepare yourself ahead of time for buying a house.
If you don’t have a good credit score and you want to buy a house, then you have some work to do. However, every ounce of effort you put into cleaning up your credit in an effort to raise your credit score will pay you back in spades. If you think about it, you will be paying on a mortgage for up to 30 years or more, so every point higher your interest is means you could end up paying thousands of dollars more than you should have if you’d only taken the time to get your financial house in order before you started the home buying process. Here are some things you need to know about how your credit score affects your mortgage.
How High Does My Credit Score Need To Be If I Want To Get a Mortgage?
Well, there’s really not one straight answer to that question. However, your credit score will dictate the kind of mortgage you can be approved for. It will also determine how much you can borrow, how much interest you’ll pay and how high your private mortgage insurance (PMI) will be. If you choose conventional financing, which is a loan that’s not insured or guaranteed by the federal government, you will need to have a credit score of at least 620, if you want your loan to be approved. If you choose an FHA loan, you will need a credit score o at least 580, if you want to qualify. And if you are a veteran and choose a VA loan, the VA doesn’t use a credit score to determine your eligibility; however, you will usually not be approved for a VA loan if your credit score is below 620.
Does My Credit Score Affect My Loan-To-Value Ratio (LTV)?
Yes, it can. Your credit history will sometimes affect how much the lender will allow you to borrow. This is called your loan-to-value ratio, which is the percentage of the sale price of the home you’ve chosen. Or the appraised value, if you are refinancing. Depending on the loan program you are applying for, some lenders will limit how high they will go on your LTV, if your credit score is below their allowable number.
Does My Credit Score Affect the PMI?
Your credit score and credit history both affect the rate you will pay for private mortgage insurance. PMI is required whenever the down payment is less than 20 percent of the price of the home. And PMI usually costs between 0.5 percent and 1 percent annually on the entire amount of the loan. That means if you have a $100,000 loan and you have a 1 percent PMI fee, you would be paying $83.33 per month, which is almost $1,000 per year. And that’s a pretty large amount to have to pay each month, not to mention what you could do with an extra $1,000 every year.
What Can I Do To Help Raise My Credit Score?
There are plenty of things you can do that will help raise your credit score. But you should work on your credit as a whole and not just focus on one area, if you want to see a significant improvement in the shortest amount of time.
Check Your Credit Report. You need to begin by checking your credit on all three credit bureaus, which are TransUnion, Experian, and Equifax to see if there are any errors. If there are credit bureau errors, you will need to work on fixing them.
Work On Your Debts. Start by paying off any collection accounts you might have then paying down any of your debts that are close to your credit limit. The goal is to get your balance on any given account to a 35 percent utilization. Anything over that is considered high. You can also work with your credit card company by asking them if they would be willing to waive any late payment fees or for a lower interest rate. Simply explain to them what you are trying to do and ask them for their help. And believe it or not, most people who ask get what they asked for.
Request a Higher Credit Limit. This seems counterintuitive; however, in some cases, having a higher credit limit can actually help your credit score. When you have a higher credit limit, but the balance stays the same, your ratio of credit-to-debt improves. And the ratio is what lenders are looking for when trying to determine your creditworthiness.
Don’t Apply for New Credit. Whatever you do, don’t apply for any new credit unless you absolutely have to. Every time you apply for credit, it will lower your credit score. And not only that, lenders frown on too many lines of newly opened credit and because of such will consider you a risk.
Open a Cash-Secured Credit Card. If your credit score is below 600, opening a secured line of credit will help. By doing so, you will be establishing a new credit line and this will show you are able to make your payments on time. Additionally, your payment history is also submitted to the credit bureau and after you have made regular payments for a few months, your credit report will show a positive trend of having a good payment history, which will work in your favor by helping you raise your credit score.
2 Point Highlight
1. Â If you are thinking about buying a house, you need to be aware of how your credit score will affect the process.
2. Â Here are some things you need to know about how your credit score affects your mortgage.
