When seeking out a home loan, your credit score is one of the main factors that lenders use to assess the likelihood that you’ll pay the loan back. Being prepared with a credit report ahead of time and understanding how the numbers on this report may affect your homebuying experience will make the process faster & easier. According to FICO, a score of 800 or higher is considered exceptional; 740 to 799 is very good; 670 to 739 is good; 580 to 669 is fair; and 579 or lower is poor. Where you fall on the credit scale will impact the cost of buying a home.
Credit Affects Homebuying
Your credit will influence your homebuying experience, from setting your sights on a home to securing a loan and everything in between. But how exactly does credit affect home pricing?
Mortgage Interest Rates
A lower credit score will probably mean a higher interest rate on your home loan. According to Forbes, someone with a score in the 680-699 range would have a mortgage rate approximately 0.399 percentage points higher than a person with a 760-850 score. This can add up a lot more interest paid over the years. Currently, the average rate for a 30-year fixed rate mortgage is 4.18%, with actual offered rates ranging from 3.25% to 8.00%. Your rate is likely to rise toward the higher end of this range if you have a low credit score.
Best Type of Home Loan for You
There are many different types of home loans. Your credit score will help you decide which is the best type of mortgage for you and weed out those you don’t qualify for. For instance, a Jumbo Home Loan will require a higher qualifying credit score than an FHA Loan. Jumbo Home Loans are made for larger loan amounts whereas FHA Home Loans are characterized by more flexible qualifying criteria, including the borrower’s credit score.
Amount of Money You Can Borrow
You are likely to receive a smaller loan amount with a lower credit score. Knowing this ahead of time will prevent you from falling in love with a house only to find out that it is out of your price range. You can also use our affordability calculator to help determine how much home you can afford.
Size of Your Down Payment
The National Association of Realtors reports the average down payment on a home is 7%. But if you have low credit, a higher down payment may offset your credit score in a lender’s eyes. This means that if you want to secure a loan with low credit you may need to prepare to dish out a higher down payment. This hurdle is a little easier to work around with programs like Down Payment Assistance. If you have a low credit score, don’t let that stop you from pursuing your dream of homeownership. For personalized credit guidance, lean on Eagle Home Mortgage’s Homebuyer Solutions Group. We’re here to help you understand and improve your credit, bringing you closer to that new home.