How much you will pay for a mortgage loan and even whether you can qualify for a mortgage will have a lot to do with your credit score. Higher credit scores will help you get the best terms possible while lower scores could keep you from your dream of homeownership.
What Makes Up a Credit Score?
Most lenders use FICO scores to determine creditworthiness. These are three-digit numbers put together using data from the Fair Isaac Co. that are supposed to determine the likelihood of you keeping up with your financial obligations. The most important factor in your credit score is your payment history – for example, how often you have paid your credit card or auto loan bills on time. The next largest influence is how big your debts are compared to how much credit you have available. The lower this ratio the better. Your credit score is also determined by the length of your credit history, the types of credit you use and how much recent credit you have applied for and/or received.
How Lenders Use Credit Scores
Your credit score is so significant to lenders because they want to minimize their risk of loan losses. They are investing hefty sums of capital with each mortgage made and want to safeguard their investment from default and foreclosure. They hope they can glimpse into your future financial responsibility by looking at how you have handled debt in the past. If your credit score is high, it tells them you have been dependable with regards to making your payments on time and a low score means you are less likely to repay their large loan. They will charge you for this risk accordingly.
And the difference of 50 to 100 points in your credit score can make a big difference in the interest rate you are offered. It could mean a spread as much as 0.25% in your rate, adding up to hundreds of dollars more per year and tens of thousands by the end of the loan.
Loan Types & Credit Requirements
The good news if you have less-than-perfect credit is that not all loans require the same credit scores.
Conventional and jumbo loans typically give the best rates only to those with high credit scores - conventional to those with scores above 720 and jumbo to those with scores of 760 or better.
Government-backed loans, however, are much more forgiving when it comes to credit score. With FHA loans, you can get the best rates as long as your score is above about 700 and you may still be able to qualify for a loan with a score of 500. VA loans don’t even require a minimum credit score, although lenders still like to see a score around 620 or higher. Department of Agriculture loans will accept credit scores as low as 640.
In most loan situations, you also have the option to pay more points to pay down your interest rate. So even if you have poor credit but you have a cash reserve, you could buy your rate down closer to the level you might receive with a great credit score.
Although lenders also use your income, assets and debt-to-income ratio in determining your interest rate, your credit score plays a major role in that process. Understanding how credit scores work and how they are used can help you get your best rate and save the most money over time.
Call Island Home Capital, Inc. today at 808-326-2444 to find out how your credit score is affecting the mortgage interest rate that you qualify for.