Buying a house is always exciting! Finding a great realtor and the perfect new home is the fun and easy part, but the reality of financial expectations can make or break the process.
What is the best credit score for buying a house? If only it were that easy! FICO Scores are rated from low at 500 and high at 700 and above. There is no absolute magic number, and you will find multiple answers according to loan types. A quick review of the suggestions below may help you navigate the best possible outcome for securing a mortgage no matter your credit score:
- Know your FICO (credit score).
- Take the proper steps to improve your score.
- Understand your down payment and interest rates.
- Research different loan types and Lenders
1. Credit Score
Knowing your credit score is the best starting point for obtaining a mortgage. As mentioned in a previous blog post, you have the right to know your score from all three major credit bureaus: Equifax, Experian, and Trans Union. Knowing your score and how to improve your creditworthiness is crucial to getting the lowest mortgage rate possible. Some government-backed FHA loans will consider credit scores below 580, but they come with higher down payments and interest rates. A credit score of 700 and above is considered a good risk and offers lower down payment options and the best interest rates available.
A low credit number does not automatically exclude you from obtaining a mortgage, but it will cost you more over the life of the loan.
2. Improving Your Credit Score
All is not lost if you find your credit score discouraging. There are numerous steps you can take to improve your score. High balances due on credit cards identify you as a high risk for lending companies. Make every effort to pay down your outstanding debts, while making savvy decisions on how best to utilize the credit you have. With a few online queries, you will find excellent advice for using your positives to reduce your negatives. Start right now by cleaning up your debts and saving your money. If you have bad ratings due to old financial mistakes, there are numerous online guides to help you define and solve some of those lingering issues. Careful money management will raise your credit score and lower your down payment requirement while giving you the chance to qualify for lower interest rates over the life of your loan.
3. Down Payment and Interest Rates
Based on your credit score, a lender will expect a certain amount of down payment. Remember low score = high risk. Your score will also determine the interest rate, and a higher interest rate can add thousands of dollars over the life of the loan. Obviously the less cash you spend upfront and over the next fifteen to thirty years matters! Current trends show a few rare FHA loans for credit scores of 500 to 579 with 10% down. Most lenders will consider a credit score of 580 to 700 as a better risk and may allow a lower down payment. Taking time to research the different loans available to your particular situation can help you find a good fit and ultimately save you money on the purchase of a home.
4. Loans and Lenders
Banks and lenders want your business! Mortgage transactions are based on facts and numbers. To the lender, you are just a credit score plus your spending history and income. A low debt to income ratio is king, making the rules of engagement easy to follow. Be sure to research and understand the many ways you may qualify for the different types of loans on offer. FHA, VA, Savings and Loans, Credit Unions, and Conventional Loans all have their set rules and qualifications. Your goal is affordable homeownership so take the time to research and understand the best choices for your financial situation.
Understanding your credit score and the risk assigned by lenders clarifies your options in obtaining a mortgage. The Gleason Team is happy to discuss ideas for finding trustworthy lending partners to help you find sound financial advice! Taking steps to understand your credit score and the corresponding lending options makes it faster and easier to make that perfect house your new home!