How Your Credit Score Impacts Your Home Financing

 

Your credit rating impacts your home financing in a twofold manner: first, a lower credit score may affect your ability to qualify for the mortgage you want; second, it impacts the mortgage amount, interest rate, and other terms you could obtain from a lender. Here is an example that could help you better understand how your credit score can affect the interest rate and monthly mortgage payment.

In general, a 100-point difference between two credit scores can increase the interest rate by half a percentage point. For instance, a 650 credit score, which falls into the “fair” range, may allow you to qualify for a 30-year fixed-rate $240,000 mortgage, with a 5% interest rate and 20% down payment. That results in a monthly mortgage payment of $1,288.37.

With a credit score of 750, however, the interest rate would be about 4.5% for the same mortgage amount, repayment term, and down payment. That would translate to a monthly payment of 1,216.04.

Because the 650 credit score leads to a monthly payment that’s $72.33 higher than the monthly payment you could get with the 750 score, you’ll end up paying $26,038.80 extra over the life of the loan if you apply for a mortgage with a credit score of just 650. To see how different credit scores and interest rates can affect your mortgage, feel free to use our online calculator.

But what if your score is lower than 620, which is the minimum required to qualify for a conventional mortgage, and there’s no way you can improve it fast enough in order to get a mortgage for the home you want to purchase? In that case, the following mortgage products with lower credit score limits could be the answer you’re looking for. 

FHA Loans

Because these loans are insured by the Federal Housing Administration, they’re considered less risky than conventional mortgages, which aren’t part of government programs. As a result, an FHA-insured mortgage has lower credit score requirements, which make it easier for many applicants to get approved for this type of loan. In addition, FHA loans typically have lower interest rates and closing costs, which make them even more affordable for qualifying borrowers. 

If you’re interested in applying for an FHA loan, you need a minimum credit of 580 and a down payment of 3.5% of the home’s purchase price. A lower rating, however, doesn’t exclude you from FHA eligibility. You can still qualify for an FHA loan with a score as low as 500 if you’re able to put down 10% or more on the home you want to purchase. As well, FHA loans don’t have any income limits, meaning there isn’t a maximum or minimum salary that could prevent you from getting an FHA-insured mortgage. However, the debt-to-income (DTI) ratio shouldn’t exceed 50%. As well, an applicant who has suffered a foreclosure or filed for bankruptcy in the past can still get approved for an FHA loan as long as he or she meets the other requirements. For an FHA loan to be approved by a lender, the home must also meet minimum property standards.   

VA loans

Backed by the VA, these loans have more lenient requirements than conventional mortgage products, even though the credit score, DTI ratio, size and term of the loan can vary considerably, depending on the lender. To begin with, the VA doesn’t impose a minimum credit score. However, most private lenders that issue these types of loans require a minimum credit score of 620. The good news is that you may still qualify for a VA mortgage with a lower score if you’re able to make a larger down payment. Depending on the amounts that applicants can afford to put down as well as their DTI ratios, lenders may require a minimum credit score between 580 and 660.

Another important consideration is that the VA doesn’t limit the income for qualifying borrowers. Instead, VA loans have “residual income” guidelines, which basically means that applicants need to meet a specific discretionary income threshold in order to qualify for this type of loan. Similar to FHA loans, VA loans also have minimum property requirements that must be met before lenders can approve these loans. 

As you can see, your credit score is one of the most important factors that can affect your ability to get the mortgage you want together with a favorable interest rate and loan term. In addition to doing everything you can to keep your credit score in good shape so you can access the most advantageous mortgages, finding the right financial advisor is imperative in order to achieve your financial goals. Our friendly professionals at North Florida Mortgage are ready to offer you the financial advice you need in order to make an informed decision and recommend the most suitable mortgage products that could help you purchase your dream home! 

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