Until closing, you need to avoid big purchases, opening/closing credit accounts, large cash deposits, and cosigning on other loans if you want to secure lender funding and purchase your dream home.
If you’re thinking of buying a home, you’ve probably been thinking a lot about your credit score as well. Credit scores control so much of what we do in the world of finances, but what does your credit score really have to do with your mortgage? Here are three ways that your credit score could impact your mortgage application.
1. Your Credit Score Affects Your Ability To Get A Mortgage
The first thing your credit score tells a lender is whether they should lend to you at all. In some cases, if you have a very low credit score, you may not be able to obtain a mortgage at all. That’s because a low credit score paints the picture of a riskier borrower and is usually indicative of someone who made poor financial decisions in their past.
Different lenders will have different criteria for determining safe and unsafe lending situations. Typically, if you have a score below the 600 mark, you’ll have trouble obtaining a mortgage.
If you’re worried about a low credit score, don’t despair – you can still get a mortgage, you just might have to work a little harder to get one. Or, you may be limited in the types of mortgages available to you. For instance, you may not be able to secure a conventional loan, but you may be able to get approved for an FHA loan, which offers less stringent lending criteria, including credit scores.
Some lenders will still lend to people with lower credit scores (just make sure you’re approaching legitimate lenders and not mortgage scam artists). They’re often known as “alternative lenders,” “private lenders,” or “bad credit lenders.” Or, if time is on your side, you can work toward building up your credit score so that when it comes time to take out a mortgage, your score will be more appealing to lenders.
2. Your Credit Score Affects What Types Of Mortgages You Can Obtain
The second thing a lender in Idaho or Colorado learns from your credit score is which types of mortgages you qualify for. If a lender sees you as a higher risk, they won’t necessarily be willing to offer you just any old mortgage.
In most cases, if you have a credit score of less than 620, you won’t qualify for a conventional mortgage, as mentioned earlier. In this case, you may have to look at different loan options that may be more lenient when it comes to the type of home loan available for bad credit borrowers in Washington and Oregon.
In addition, if you have a lower credit score, you may have to make a larger down payment in order to qualify for the type of mortgage you want.
3. Your Credit Score Affects Your Interest Rate
The final thing that a lender learns from your credit score is what type of interest rate they’re willing to offer you. Not only does your credit score affect your ability to get approved for a mortgage, but it also affects the mortgage interest rate you are offered. As a general rule, the higher your credit score, the lower the interest rate.
However, just because you have a high credit score, that doesn’t mean you’ll automatically get a great mortgage rate. There’s more that goes into the price of a mortgage than just the interest rate, so watch out for additional factors like extra fees, mortgage insurance, lock-in periods, and so on.
Your credit score tells a lender a lot about what type of borrower you are. Ultimately, a higher credit score means that you’ll be able to borrow money at a lower interest rate. So, the higher your credit score, the better the odds of you being able to secure a lower rate.
This is very important because your interest rate will have a direct impact on the overall cost of your mortgage. With a lower rate, you’ll end up paying less in interest over the life of your loan, which can translate into savings of tens of thousands of dollars, or more.
But if your score is low, don’t worry – there’s a lot you can do to bring up that score before you apply for a mortgage, so don’t throw in the towel just yet!
What Factors Affect Your Credit Score?
Your credit score is a number between 300 to 850. Generally speaking, anything over 620 is considered to be around the minimum score needed to secure various mortgage types, low lower scores are often accepted in certain situations and certain loan types.
There are plenty of factors that affect your credit score and how it is calculated, including the following:
Payment history. The most important thing that affects your credit score is your history of bill payments. If you have a history of always paying every bill on time and in full each billing cycle, then your credit score will likely be quite high. But a habit of late or missed payments will have the opposite effect on your score.
Credit utilization. The amount of debt you have relative to the amount of credit you have available to you also plays a role in your credit score. You should aim to use no more than 30% of your available credit to keep your credit score up.
Credit history. The number of accounts you have and how long they have been open will also impact your credit score.
New loan and credit account applications. It’s not recommended to open many credit or loan accounts within a short period of time, which can have a negative impact on your credit score.
Credit mix. Your credit score can also be affected by how many different types of credit accounts you have. Generally speaking, having a healthy mix of credit (such as a car loan, line of credit, and credit card) is good for your credit score.
Every financial situation is different, so if you want to find out more about how your credit score will affect your mortgage in your specific circumstance, talk to your mortgage professional.
Ready to Apply For a Mortgage in WA, OR, CO, or ID?
Do you have questions about home loans? Are you ready to apply for a mortgage to buy a home? If so, Sammamish Mortgage can help. We are a local mortgage company from Bellevue, Washington serving the entire state, as well as Oregon, Idaho, and Colorado. We offer many mortgage programs to buyers all over the Pacific Northwest and have been doing so since 1992. Contact us today with any questions you have about mortgages.