Are you in the market for a new home? Or perhaps you are considering refinancing? In either case, your credit score will have a direct impact on your loan eligibility and your interest rate. What exactly are lenders looking for? Let’s take a closer look.
In most cases, lenders are looking for healthy FICO scores. The minimum FICO score to secure an FHA loan is 580. While there are some exceptions, it’s best to work to get your credit score closer to 700. Those ranging between 700 and 720 are eligible for low interest rates and those with a FICO score of 750 or higher have access to the most competitive rates on the market. If your credit score is on the lower end of the spectrum, now is the time to improve it.
Lenders prefer to loan money to those who carry low credit balances and have an extended history of paying of their debts. In addition they like to see borrows who carry a mix of credit, such as: car loans, credit cards and/or student loans. If you have little to not credit, there is no time like the present to start establishing your credit history!
Lenders will look at your debt to income ratio as well as your ratio of available credit to outstanding debt. When determining your approval amount, they will look at both your current debt to income as well as your prospective ratio with a new mortgage. If you currently carry a significant amount of debt, work to pay it off as you prepared to apply for a home loan.
Credit Scores and Interest Rates
As we mentioned above, your credit score will directly impact your interest rate. How dramatically? An excellent rating can qualify for the best rates a lender can offer while a bad credit rating can cost you thousands. An example would be a first time homebuyer with a credit rating of 720. At a 3.5% interest rate on a $200,000 loan, they would pay roughly $123,000 in interest. Compare this to another first time homebuyer with a credit rating of 650. At a 5.5% interest rate on a $200,000 loan, this person would pay around $209,000 in interest over the life of their loan. This is precisely why it’s so important to improve your rating if you are currently ineligible for low rates.
Ready to make your dream of owning a home a reality? Start with your credit! Learn How to Improve Your Credit Score in our complete blog post on the topic. If you are ready to apply for a mortgage, we encourage you to contact us today! Allow us to help you through the process of securing a home loan.