How Your Credit Score Impacts Home Loan Rates

Your credit score will determine whether or not you will get the loan, along with the interest you will be paying. In cases where you are a first-time home buyer or getting refinanced, it is fundamental to understand the impact that your credit score has on home loan rates by seeking the expertise of companies such as Matazwel Mortgage.

In this blog, we will explore what a credit score is, its influence on home loan rates, and a few things you can do to improve your credit score before buying your dream house.

What is a Credit Score?

The score comprising your credit is a three-digit number that computes creditworthiness on account of information concerning previous payments, existing debts, types of accounts owned, credit history, and inquiries lately contained within your report.

Credit scores range from 300 to 850, and higher values indicate a better situation for the borrower with a low credit risk.  A major type of credit scoring model, apart from FICO®, that actually uses this nomenclature is VantageScore. Both use grading or a point scale.

Credit scores fall under five categories:

• Poor (300-579): First-home buyers may not be able to gain approval for loans or gain approval for high-interest loans if they qualify.

• Fair (580-669): Buyers have a chance of getting mortgages and in most cases, however, with higher interest rates.

• Good (670-739): There is a good possibility that it can get homebuyers the most competitive interest rate and ideal loan terms as well.

• Very good (740-799): This credit score helps homebuyers avail of low-interest loans combined with good loan terms.

• Excellent (800-850): It helps the buyers attain extremely low interest rates accompanied by excellent loan terms.

This score assures lenders about recovering the loan amount from you. Your credit score is essential because when it is higher, the risk is small for lenders; thus, there is a better possibility of lower interest rates.

How Does Your Credit Score Impact Your Home Loan Rate?

The interest rate on home loans depends upon your credit score. Your credit score is a fairly reasonable estimation of your ability to pay back the loan to the lender. The influence of a credit score on interest rates is as follows:

• Higher Credit Score = Lower Interest Rate: Lenders pay back borrowers with higher credit scores. It saves thousands of dollars over your mortgage lifetime because even with a very small difference between interest rates, it really adds up to tens of thousands of dollars for a loan.

• A Low Credit Score = A High Rate of Interest: In simple terms, if your credit score is low, it simply indicates that the lender is at a higher risk. The lender adjusts the interest rate due to such risks. You would still be eligible for getting a mortgage, but you’ll have to pay a high interest due to bad credit scores.

• Loan Approval vs Denial: Over a bad credit score, you might face denial in getting a mortgage. Many lenders establish minimum credit scores for approval on the loan; if your score is poor, you will not get a home loan. Even after getting approved for a loan with a poor credit score, your choice of the type of loan and other terms will be extremely limited.

The Impact of Your Credit Score on Different Types of Home Loans

Most home loans have different credit requirements that can vary and affect the loan rate. Here’s how your credit score can impact these types of loans:

• Conventional Loans

These are non-insured by the government and most of them demand higher credit scores. If one is able to reach a credit score of at least 620, the loan would be given, and a better credit score puts anyone in an even better probability of a lower interest rate. A low credit score allows for having either higher interest rates or asking for higher down payments.

• VA Loans

VA loans are offered to all active-duty personnel, veterans, and other surviving spouses who are eligible. It does not require a credit score from the Department of Veterans Affairs, but most of the lenders will ask for that to be at least 620 or higher. Most VA loans have even better terms when compared to the traditional loan in terms of your credit score.

• FHA Loans

An FHA loan is one that the Federal Housing Administration insures for homebuyers with poor credit ratings; these are offered to first-time homebuyers. In general, a score of 580 or more will qualify one to be granted a 3.5% down payment, but below 580 does not immediately disqualify buyers, they will need to raise their down payment a little higher.

• USDA Loans

USDA loans provide a facility to purchase rural and suburban homes. The US Department of Agriculture insures them. Credit scores as low as 640 qualify for a USDA loan, though USDA loan interest rates are very competitive and may not depend on how poor the credit score is.

How Much Can Your Credit Score Affect Your Mortgage Rate?

Your credit score might be different; consequently, your mortgage rate will differ. A government-backed business known as Fannie Mae conducted a study that indicated that interest rates on home loans were lowest for borrowers when their credit score was at or above 760. Those scoring between 620 to 639 have to pay from 1.5 to 2 percent extra.

Now, assuming you are agreeing upon a 30-year fixed mortgage rate at $300,000. Here’s how changes in interest rates affect your monthly interest rate:

• A 760+ credit score lands you into a bracket for eligibility on the 3.5% rate and, therefore, increases your monthly payout to almost $1,347.

• 620-639 credit scores attract a 5.5% interest rate, meaning your monthly payment will be approximately $1,703.

It means spending $356 a month or $4,272 annually. You would have paid an extra $128,160 at a higher interest rate over the life of the loan.

How to Improve Your Credit Score Before Applying for a Mortgage

If your credit score is not up to the mark, you can do multiple things to improve your credit score before applying for a home loan:

• Check Your Credit Report: You’ll probably have some errors in your report when you check it, so dispute them right away when you find them.

• Look Out for Errors: Errors that include late payments or unaccounted balances are common and reduce your credit scores.

• Maintain Low Credit Card Balances: Even your credit card balances can factor into your credit score. As much as possible, ensure that the balances on your cards are at most 30 percent of your available credit.

• Avoid New Accounts: One of the worst things about your score is applying for a credit account. If you will need a mortgage anytime soon, avoid new accounts for a few months before that date.

• Secured Credit Card: Having a poor credit score or simply having a small credit history calls for a secured credit card. Use it responsibly and settle the monthly balance in full.

• Pay Bills On Time: This is one of the factors that determine your credit score through payment history. Put reminders or set automatic payments to avoid failing to meet deadlines.

Conclusion

The most important determinant of interest rates on home loans is your credit score. The better your score is, the more favorable the rate is for you, hence better over time. The worse your credit score, the higher the interest rates are likely to be, making you ineligible or not easily approved. Understanding your credit score with the help of mortgage experts such as Matazwel Mortgage, and taking steps to improve it will increase the chances of getting a favorable mortgage rate, thereby lowering the overall home cost.