Part of building your net worth includes owning your home. There is a great sense of satisfaction and achievement once you’ve reached that financial milestone. But it takes a lot to buy a house. Home loan application is often a difficult process to most borrowers because lenders are too careful in their borrower selection. Your credit score serves as the starting point of that selection process.
How Important is Your Credit Score?
Stated by a credit repair specialist, your credit score is the best representation of your credit quality. It is based on your credit record that details your credit history and management. For you as the borrower, it sets the parameters of credit opportunities that you can have. For your lenders or creditors, they use your credit score to determine the potential risk that is involved in extending credit to you.
For a home loan, your credit score is used as a qualifying tool. By just looking at your score, lenders are able to provide you with initial information about loan programs that best fit it. A high score of 740 or higher merits you low down payment, low interest rates, and flexible terms. With a low score, those loan features will not be the same. Likewise, credit scores can now reveal the possibility of default in mortgage payments based on a FICO research. For instance, if you have a score within the range of 580 to 669, you have 28 percent chance of defaulting on payments.
Credit score requirements in home loans vary depending on the mortgage type, but on the average the minimum credit score you need must be within the range of 580 to 640.
Can You Still Get a Home Loan With Low Credit Score?
If you have a low credit score, know that there are many lenders out there willing to help out borrowers acquire a home even with low credit score. But your credit score is not the only thing that lenders take into consideration when it comes to approving your loan application. They will still go through a process of analysis that factors in your credit report, work status, sources of income, debt-to-income ratio, and how much you can put down as collateral.
Keep in mind though, lenders with strong risk appetite offset such risk by charging higher rates. This will make your home loan more expensive and challenging to repay. With the cost of borrowing now so much higher, you would end up buying a house with less value and features as you have originally planned.
How to Raise Your Credit Score
What you want is to get your home loan right at the onset – high principal amount with low interest rate. A big portion of your initial mortgage payments goes toward paying off interest charges, and then tapers off later on. If you have a good or high credit score to begin with, you lessen that financial impact and get to pay off your principal amount much sooner.
Improve your credit score by making sure you:
- Pay your bills on time
- Bring down your credit utilization to 30%
- Never close any old account
- Obtain a good credit account mix
- Avoid making hard inquiries or applying for a new credit account
The opportunity to own a home is open to everyone. If you do your part in keeping your credit quality in good shape, there’s no reason for lenders to see you as a risky borrower or deny giving you credit.