Credit Scores and The Home Buying Process Explained
A large purchase can seem quite daunting, especially if your credit score isn’t the best. The good news is, that having a lower credit score doesn’t eliminate your chances of qualifying for a loan. There are plenty of options for homebuyers with low scores, high scores, and all scores in between.
Continue reading to learn more about how your credit score affects the home-buying process.
Set Yourself Up For Loan Success
When preparing to invest in a home, one thing you can do to set yourself up for success is to get your finances in check early on. Here’s what we recommend:
Eliminate Bad Debt
This isn’t always easy. Nearly 80 percent of Americans have some form of debt. While it may not be possible to get rid of all of your debt, minimizing it even slightly could help your credit score. When applying for loans, lenders like to see that an individual’s overall debt is less than 28% of their income. The lower the debt-to-income ratio, the better off you’ll be.
Avoid Extra Credit Inquiries
About six months before applying for a loan, try to avoid hard credit inquiries. A hard inquiry means applying for credit like another loan, a credit card, or even switching mobile providers. When your credit report shows a lot of hard inquiries, not only does it lower your credit score but it can also deem you as being a “high risk” candidate to a lender — meaning they’re less likely to loan you money. These hard inquiries are not to be confused with soft inquiries, however. Soft inquiries are when you inquire about your credit score yourself and these will not impact your score.
Pay Your Bills On Time
Did you know that paying your statements on time makes up 35% of your credit score average? This is one of the easiest ways to maintain a healthy credit score but sometimes one of the easiest to forget. A good solution offered by many utility and billing companies is to set up an automatic payment. This is a great way to get your finances in check without having to think twice about it!
As mentioned above, when a lender is determining whether or not to offer you a home loan, a huge factor they look at is your credit risk. Credit risk is the potential that a borrower (you) will fail to meet the payments on the money being loaned. This is why a good financial history can do wonders for obtaining a decent loan.
Home Loans For Any Credit Score
Generally, a lower credit score means higher mortgage rates. Luckily, home loans come in all different shapes and sizes! The type of loan you choose for financing your home depends a lot on what your circumstances are. Conventional and FHA (Federal Housing Administration) loans are two common types of loans that people use to finance their homes.
Conventional Mortgages
Conventional loans typically require a credit score of 620 or higher. This loan is great for individuals who have the resources for a larger down payment upfront and who have a strong financial track record. However, if a hefty down payment seems out of reach, you can still obtain this type of loan with the help of private mortgage insurance
Government Insured or FHA Mortgages
Government-insured loans like FHA require a credit score minimum of 500, as compared to the 620 or higher required for conventional loans. These loans are often easier to obtain due to the lower credit score minimum and require a lower down payment than conventional loans do.
However, FHA loans require a mortgage insurance premium that can last for several years, making them a little pricier than they initially seem. This type of loan is best suited for buyers who are just starting financially or who have limited resources available for a bigger down payment–typically first-time home buyers!
Consult With a Redbud Group REALTORS® To Begin Your Home Buying Journey
Although the home-buying process can be confusing, you can have peace of mind knowing that you are not alone! Here at The Redbud Group, our team of expert real estate agent will take the time to understand your wants and needs to help you navigate the home-buying process with ease. Having a trusted agent by your side makes all the difference — and The Redbud Group REALTORS® are the best of the best!
Use the button below or visit our website to schedule a complimentary consultation with our team and get one step closer to finding your dream home!
