What is Credit and Why You Need it to Purchase a Home
A credit score is a numerical representation of an individual’s creditworthiness and ranges between 300 to 850. The higher the credit score, the more likely the individual is to repay their debts and the less risk they pose to the lender.
Individuals with high credit scores are considered to be low-risk borrowers and are more likely to be approved for loans and credit cards, and to qualify for lower interest rates.
When buying a home, credit is important because it is one of the key factors that lenders consider when determining whether to approve an individual for a mortgage.
A strong credit score and credit history can help an individual qualify for a lower interest rate on their mortgage, which can save them thousands of dollars over the life of the loan.
It can also make them more likely to be approved for a mortgage in the first place.
Additionally, a good credit score can also help you to negotiate better terms with the builder or the seller of the property.
It is important for an individual to maintain a good credit score by paying their bills on time, keeping their credit card balances low, and not applying for too much credit at once. It is also important to check your credit report regularly to ensure that the information it contains is accurate and up to date.
Credit Scores Needed for Mortgage Rates
The credit score needed to qualify for a mortgage loan will vary depending on the lender and the type of loan. However, generally, the higher your credit score, the more favorable the mortgage rate will be.
For a conventional mortgage loan, a credit score of at least 620 is typically required.
For an FHA loan, a credit score of at least 580 is typically required.
For a VA loan, there is no minimum credit score requirement.
For a jumbo loan, a credit score of at least 700 is typically required.
It’s worth noting that having a good credit score is not the only requirement to qualify for a mortgage loan. Lenders will also consider factors such as your income, debt-to-income ratio, and the value of the property you are looking to purchase.
Impact of a Low Credit Score on Mortgage Rates
A low credit score can have a significant impact on your mortgage rate. Lenders view borrowers with low credit scores as higher risk, and as a result, they may charge higher interest rates to offset that risk. According to the Consumer Financial Protection Bureau, a borrower with a credit score of 760 or higher can expect to pay an interest rate that is 1.5 percentage points lower than a borrower with a credit score of 620.
The Long-Term Impact of a Bad Mortgage Rate
The long-term impact of a bad mortgage rate can be significant.
Example
As shown above, on a 30-year fixed-rate mortgage of $1,000,000 with 10% down and a 6% interest rate, the monthly mortgage payment would be $5,396 However, if the interest rate were to increase to 7%, the monthly mortgage payment would increase to $5,988. This means that over the life of the loan, the borrower would pay an additional $213,036 in interest!
Top Companies that Can Improve Your Credit
When it comes to improving your credit, there are a variety of companies that can help you achieve your goals. These companies can provide credit counseling, credit repair services, and credit monitoring to help you better understand and manage your credit.
- Credit Karma: This company offers free credit monitoring and credit score tracking. It also provides personalized recommendations for credit cards and loans based on your credit profile.
- Credit Sesame: This company also offers free credit monitoring and credit score tracking. It also provides personalized recommendations for credit cards, loans, and insurance based on your credit profile.
- Credit Repair.com: This company specializes in credit repair services. They work to dispute errors on your credit report and negotiate with creditors to remove negative items.
- Lexington Law: This company also specializes in credit repair services. They have a team of attorneys and paralegals who work to dispute errors on your credit report and negotiate with creditors to remove negative items.
- Credit Counseling of America: This non-profit organization provides credit counseling and financial education services. They can help you develop a budget and a plan to pay off your debt.
