Your Credit Score: What does that number really mean?
The importance of having a good credit score when buying a home is not something most people find surprising. A person’s credit score provides their lenders with a great deal of important information about the person and how much they could afford to spend on a home.
However, what most people don’t know is what exactly that number means and the role in places in whether or not you get a mortgage or where you are able to get your mortgage from. In addition to determining whether or not you can qualify for a mortgage, it can determine the type of home you can buy, what your interest rate is, and much more!
Minimum Credit Scores
Sure, everyone knows there is such a thing as a ‘good’ credit score or a ‘bad’ credit score. You also know that good credit scores allow you to get a mortgage while bad ones don’t. But what exactly is a good credit score?
Depending on your down payment, salary history, and current wages you may have a bit more wiggle room…
A ‘good’ credit score is often described as being in the 700s. However, just because your score is not in the 700s doesn’t mean that your house hunt is hopeless.
Depending on your down payment, salary history, and current wages you may have a bit more wiggle room with your credit score. For example, a company called Cornett Communications estimates that a score of 650 can often help you get a mortgage. Keep in the mind that the better your score, the better your interest rate or chances of getting one.
Government-backed lending houses often have more lenient guidelines as far as credit scores. Fannie Mae for example used to allow a credit score of 580. However in 2009 they changed their policy, raising the minimum to 620. If you are looking into FHA or Veteran’s Administration loans, then the minimum required is only 580.
So your low score doesn’t need to make or break you.
What does your score do?
According to Fair Isaac Corporation (FICO), the lower your score the higher your interest rates tend to be. This is something important to keep in mind because purchasing a home is a long term investment.
The lower your credit score the higher your interest rates tend to be
A ‘risky’ score of 620-639 would pay an average of 5.718% (on a $300,000, 30 year conventional mortgage) whereas if you had a score of 760-850 your percentage would be 4.129%. Although this different might not seem that substantial, over the course of 30 years there would be a noticeable savings.
Improving your score
So although your score might not prevent you from getting a mortgage you may want to consider what you can to help your score. There are many easy steps you can take such as paying bills on time, paying off your credit card balances, try not to max out your cards.
Please contact us for more information about purchasing a home!