Your credit score.
No single number can play as great a role in your real estate future as these simple three digits.
It’s a judgement, an algorithmic judgment, of your creditworthiness. One of the deciding factors as to whether or not a bank can trust you to pay back a mortgage.
So when you are thinking about buying a new home, this number is one of the first things you need to stay on top of. In this post, we’ll explain what your credit score means and how it really affects the home buying process.
Simply put, a credit score is a number ranging from 300 to 850 that is calculated by three major bureaus (Equifax, Experian, and TransUnion) to determine how well you will be able to pay back a loan. The higher your score the better your credit history, and the ranges are typically described as follows:
750 – 850 Excellent
700 – 749 Good
650 – 699 Fair
550 – 649 Poor
0 – 550 Bad
Your score is algorithmically calculated on a wide range of elements of your financial history. The most common factors include your credit card utilization, age of credit, payment history, and derogatory remarks (such as being reported to collections or filing for bankruptcy).
Your credit score is a prediction of how likely you are to be able to keep up with payments consistently and on time.
Even though you might be fully committed to paying back your mortgage, lenders have no way to objectively measure your internal determination and sticktoitiveness. That’s why they use your credit score (among other factors) to decide just how much of a risk they are taking when they loan you money.
A high credit score tells them that you are very likely to pay them back, so they can risk giving you a lower interest rate (which equates to lower monthly payments for you). If your score is low, the bank has to make up for the increased risk by charging you more in interest.
While interest rates and terms will vary from lender to lender, we can offer a general guide to what your credit score can get you.
For starters, if you are in the excellent credit range with a score of 750 or above, you will probably be getting the best possible interest rates from banks. After that, as long as you’ve got a score of at least 660, then you will probably qualify for a home loan.
This doesn’t mean you can’t get a mortgage with a score less than 660; it just means that your options are more limited. An FHA loan, for example, is meant for buyers with low credit scores, and as long as your score is above 580, you’ll only need to put 3.5% down. Any lower, though, and you might have to pay as much as 10% down.
If we had to put an absolute minimum number to qualify for any sort of mortgage, it would be 500. With a score lower than 500, you’ll have a hard time convincing lenders of your creditworthiness. Your time could be better spent repairing your credit history and saving for a down payment.
We know it can get confusing, so if you are trying to get a better idea of exactly what you’ll be able to qualify for, let us help you get in touch with a lender today.