When it comes to credit scores and applying for a home mortgage, your first thought may fall to whether or not you qualify. But, your credit score not only plays a critical role in your ability to qualify for a home loan, its influence continues when it comes to your down payment requirements, interest rates and other mortgage terms. Here’s what you need to know:
Minimum score to qualify
The four main types of loans—conventional, FHA, USDA and VA—all have somewhat different minimum scores to qualify:
- Conventional loans: Minimum of 620 to 640, depending on loan type
- FHA loans: Minimum 500, with borrowers averaging about 680
- USDA loans: Minimum 580, though 640 is preferred
- VA loans: No credit score requirement
On FHA loans, your credit score also determines the minimum down payment you’ll need. If you have a score of 580 or above, you’ll be required to make at least a 3.5% down payment. But, if your score is 579 or lower, your down payment will need to be at least 10% to gain approval.
How your score impacts your loan
Your score will also have a direct impact on the cost of your financing. A high score makes you less of a risk and lenders will reward you with some of the best available rates. A low score, on the other hand, makes you at higher risk of defaulting on your mortgage. To compensate, your interest rate will be higher.
A bright spot: today’s super low interest rates mean your credit score will have less impact on your interest rate. But unless you are buying immediately, be aware that a higher interest rate can be costly over the life of your loan, adding tens of thousands of dollars to your loan amount.
Why your score may surprise you—and not in a good way
If you’re planning to apply for a mortgage, you may have been monitoring your credit score for awhile. While you may be proud that you’ve raised your score, you may be greeted with some unwelcome news—your credit score isn’t nearly as high as that consumer credit reporting app was telling you. So, what gives?
A number of factors could be at play. There are actually a broad number of FICO scores and often that’s why you’ll see a difference in scores. You can also see multiple versions of your score, depending on who issues it—FICO, a bank, or VantageScore. What score is used is also dependent on the industry involved, such as automobile or mortgage.
When it comes to your credit report, most mortgage lenders will rely on a tri-merge report showing results from all three credit bureaus or a residential mortgage report, which provides an even broader snapshot of your financial status.
Here’s how to raise your score
If you need to raise your credit score, whether to qualify or to get the best terms, time is often the best healer. Keep up-to-date on all bills and over time, you will be rewarded with a higher score. That being said, here are steps you can take to nudge your score upward:
To raise your sore, concentrate on the following:
- Pay down existing debts and credit balances
- Resolve any credit issues or collections
- Remove anything reported in error
- Avoid taking on new debt
- Always pay your bills on time
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