A credit score doesn’t really come until to play — until the time comes where you need to buy a house or a car. It is no secret that having a low credit score significantly reduces your chances of getting a loan from a bank, credit union, or other financial institution.
When it comes to purchasing a home specifically, if you have a negative credit report, you might have to come up with some other options to ensure that you have enough to make the purchase, like a significant down payment. At 360 Credit Counseling, we can help you improve your credit score so that you can feel comfortable taking on life’s biggest moments and milestones. In this blog, we share how a credit score can affect your chances of getting a mortgage loan.
HOW YOUR CREDIT SCORE AFFECTS BUYING A HOME
Your credit score and credit history can have a significant influence on your ability to get a mortgage. Mortgage lenders use your credit report to gauge your risk as a borrower. In this instance, the lower your score and more irregular your history, the riskier you are viewed as to most lenders. To ensure they are protected from any risk, lenders will typically offer higher interest rates to borrowers with lower scores. Oppositely, borrowers who have a higher score and cleaner credit history will be more likely to receive a lower interest rate — and lower monthly payments — for their mortgage loan.
UNDERSTANDING YOUR FICO SCORE
A FICO® score, which is a credit score calculated with software from the Fair Isaac Corporation, is what most lenders use to determine a person’s eligibility for a mortgage and other loans. A FICO credit score grades consumers on a scale of 300 – 850, with a higher score indicating less risk to the lender. A person’s grade is determined by examining financial data and comparing information with other consumers to come up with a relative ranking that will ultimately determine approval and the interest rates associated with their mortgage loan. Here is a breakdown of the FICO score model:
- 800 or higher: Exceptional
- 740-799: Very good
- 670-739: Good
- 580-669: Fair
- 579 or lower: Poor
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Another silver lining is that each lender has different criteria for the mortgage loans they offer. It is recommended in this situation to look around with dealers and see what they offer you. Depending on your luck, you may be able to get a reliable lender with an acceptable interest rate. There are mortgage lenders that specialize in low credit home loan options, too. While these lenders are a great way to get a loan with low credit, those who choose this route should be prepared to pay a higher monthly mortgage payment due to much higher interest rates.
WAYS TO IMPROVE YOUR CREDIT SCORE
If your credit score is good, it will save you a lot of hassle and worry. Try and keep the bills paid on time and recover any big loans you might have taken. If you would like your credit score to be higher, there are things you can do to improve it before you purchase a home. Here are some helpful suggestions:
- Opening accounts that will be reported to major credit bureaus, like TransUnion, Equifax and Experian to build your credit file.
- Avoid missing payments by more than 29 days to build up a favorable payment history.
- Catch up on past-due accounts with the help of a credit counseling service like 360 Credit Counseling
- Pay down revolving account balances and keep your balance low relative to your credit limit.
- Limit how often you apply for new accounts to reduce the amount of hard inquiries on your account.
If you’re planning on purchasing a home in the near future and want to make sure your credit report will open doors to great rates and options, 360 Credit Counseling can help. Contact us today to learn more about the services we offer.
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