August 15th, 2018 By Chris Thompson in Blog
Buying a home can quickly turn from a dream come true into a logistical nightmare if you aren’t on top of your finances. Red flags in your credit report or a low credit score will alarm lenders as they evaluate your candidacy for a loan.
Factors Affecting Mortgage Qualifications and Interest Rates
When a lender analyzes your loan application, they’re checking to see if you’d be a good long-term investment. They want to make sure you’ll pay back your loan in full and on time.
Lenders will assess your:
- Debt-to-income ratio
- Assets, and
- Credit rating
Though there are a variety of credit scores out there, most lenders look at the three FICO scores from TransUnion, Experian and Equifax and make decisions based on the median number. They also scan your credit report for signs of late payments (especially recent ones), collections, hard inquiries and any other signs of potential financial irresponsibility.
What Type of Loan Do You Qualify For?
Despite what you may have heard, you can qualify for a mortgage or home loan even if your credit score is low. However, a low credit score may preclude you from qualifying for certain types of loans.
Here is a breakdown of the minimum credit score you need for various home loans:
- FHA Loan – 500, industry average is 640
- VA Loan – no technical minimum, industry standard is 620
- Conventional Loan – 620
- USDA Loan – 640
- Jumbo Loan – 720
Even if you meet the minimum credit score, some lenders may reject your application because they operate by stricter guidelines. And, more often than not, people with lower credit scores will have to pay higher interest rates and make larger down payments.
Some of these loans have additional criteria besides credit score. For example, VA loans are only available to veterans, active military personnel and their families, and USDA loans only apply if you’re moving to a rural area.
What Are the Current Interest Rates?
Let’s say you do qualify for a home loan. Congratulations! Now comes the tough part – seeing if you’re comfortable with the interest rates.
In general, your interest rate will change for every 20-point dip or bump in your credit score. That means missing a few payments or opening new lines of credit before applying for a loan could impact your interest rate for years to come.
A large drop in your credit score from 720 to 620 could even result in you paying tens of thousands of dollars in additional interest over the course of your mortgage.
You will have to do some research to find out the exact interest rate you are dealing with. Mortgage rates change constantly, and each lender will approve you for a slightly different rate, so there is no precise credit-score-to-interest-rate calculator online. You’re more likely to get specific answers by rate shopping between lenders.
How to Choose a Lender
Picking the right lender can make all the difference as you navigate the home loan application process. If you already know a lender you trust, meet with them prior to making any major decisions. You can also contact a realtor and have them put you in touch with a lender they work with and respect.
Every lender can give you the same rate, more or less, because it’s based on your credit score and debt-to-income ratio. Therefore, try to find the lender that gives you the best service rather than rate shopping endlessly.
Credit Management Do’s and Don’ts
If you are considering applying for a home loan within the next year, start taking steps to raise your credit score and improve your credit report now. Be sure to:
- Check your credit report for free with all three major credit companies
- Correct errors on your credit report
- Pay off some debt if possible
- Refrain from using more than 35 percent of your available credit
- Consider locking your mortgage rate
- Meet with a credit counselor, if applicable
You also want to avoid any missteps leading up to the application. Do not:
- Open many new lines of credit
- Close lines of credit to try to inflate your score
- Rate shop for longer than 14, 30 or 45 days, depending on the credit scoring model
One Last Consideration
There’s one more option if you’re overwhelmed by your credit score or high-interest rates: postponing the home-buying process. You may benefit from taking a break to bolster your credit so you can qualify for better interest rates down the road.
Fetching a Great Price for Your Maryland Home
Are you ready to apply for a home loan? If so, now’s the perfect time to work with the Rick & Chris Thompson Team to get your old house sold! We guarantee that we can sell your home in 29 days, and our service is so stellar that 80 percent of our clients are repeats or referrals.
Call us today at 301-758-2679 to get started!