You probably know you need good credit to buy a home but may not understand exactly what that means. How good does it need to be? And are there options if your credit is low?
Your credit scores drive your ability to get approved for all types of loans, including mortgage loans. People with great credit end up spending tens of thousands of dollars less over the course of their lifetime than those who have low credit scores!
While it’s not impossible to secure a mortgage loan with less-than-great-credit, it’s probably going to be more expensive. Here’s what you need to know about how your credit scores impact your mortgage interest rate.
Important Note: You Have 3 Credit Scores
There are three bureaus, Experian, TransUnion, and Equifax. Each of them gathers information on how you manage your finances and deal with debt. They are competitors so they don’t share information. When a Loan Originator pulls your credit, you’ll most often have 3 scores that differ. Typically, a mortgage lender looks at the middle score to gauge your credit worthiness.
Your credit scores are highly predictive of whether you will pay your mortgage loan on time. The higher your scores, the more confident the lender will be in lending you money. However, if your credit scores are low, you pose more of a risk. That’s why getting into a home will cost you more money.
Let’s break it out.
Over 760? Smooth Sailing!
A “perfect” credit score is 850, which is the highest possible. The good news is that you don’t have to achieve that elusive perfection to enjoy the lowest interest rates. Scores of 760 or above are considered “Excellent” and get you into the widest variety of loan options with the best interest rates.
700-759? Lots of Options
You’re still in great shape with these credit scores, which are considered “Very Good” by lenders. Paying your bills on time and managing your credit card debt wisely is exhibited by positive scores. No, you’re not quite in the credit elite of those with 760+ scores, so you may pay a slightly higher mortgage rate, but usually it won’t be more than a quarter of one percent (.25%) than the lowest rates available.
660-699? Paying A Bit More
Maybe you have paid a couple of your bills a little late in the past, or you’re carrying a significant amount of credit card debt. Both of these missteps can decrease your scores, so you fall into this range. Rated as “Good,” credit scores from 660-699 can still net you a decent mortgage loan. You will be left out of the very best rates and be expected to pay about half a percent (.5%) higher on your interest rate than those with excellent credit.
620-659? Options Are Dwindling, and Getting Expensive
Landing in this section of the scoring population isn’t great, but it’s not horrible. The bright side is that you can most likely still qualify for a mortgage loan. The flip side is that your options aren’t as plentiful as they’d be if you had better credit scores, and it’s going to cost you. Borrowers whose credit scores are in this range can expect to pay 1.5% more for interest rates than those with excellent credit.
580-619? Rates Significantly Rise
This section is viewed by lenders as “Poor Credit” and consumers who fall in this category have usually had frequent and/or severe problems with paying late, and/or credit card balances that are pushing the credit limit. Since lower scores equal greater risk, you’re going to pay quite a bit more to get into a home loan. Your mortgage rate may be 2-4% higher than the best rates.
Below 580? Few Options – if any
If you’ve made serious credit mistakes, had an account go into collections recently, filed for bankruptcy or frequently allowed your bills to lapse, you could have landed in this “Very Poor” credit category. Getting qualified for a mortgage may not even be possible at this point, and if you do, you’ll be paying significantly higher interest rates.
NOTE: It’s important to remember that credit scores are fluid and, while your scores may not be excellent now, they can be better in the future. If you’re paying late, get current and stay current to build-up positive payment history. Start paying down the balances on your credit cards. Perhaps the most important move to make is to order a copy of your credit report and dispute any errors you find.
The lower your credit scores are, the more money you’re going to end up spending for a mortgage loan. Credit scores can also affect the amount you’re required to pay down, the loan-to-value ratio, and the availability of certain programs. Take charge of your future and get a full explanation of the options available to you by contacting an experienced MIG loan originator today to schedule a meeting.