You’re ready to purchase a home - but have you looked at your credit score lately? Your credit score as a home buyer is not only one of the most important variables when applying for a mortgage, it is also the first thing a mortgage lender will check to see if you qualify for a loan. Your credit score affects how much you can borrow, the kinds of mortgages for which you can be approved, and your mortgage rate. The minimum acceptable credit score depends on the type of home loan you qualify for, but conventional financing for buying a home usually requires a minimum credit score of 620. 

Pricing Based on Risk

Mortgage lending is based primarily on risk-based pricing. Lenders increase the cost of your mortgage for each risk associated with your credit profile. The lower your credit score, the higher the rate you will pay for a mortgage. For example, the difference between a 750 credit score and a 625 score can add one half of a percent to your loan rate. On a $200,000 30-year mortgage with a 750 credit score, you would pay $912/month with a 3.625% interest rate. For the same $200,000 30-year mortgage with a credit score of 625, your monthly payment would be $969 with a rate of 4.125%. If you multiply this $57 per month difference by the 360-month term of the loan, that’s an extra $20,520 over the life of the loan. 

Credit History Affects Your Loan-to-Value Ratio

Your credit history can limit how much you can borrow on a certain property. This is referred to as a loan-to-value ratio (LTV). LTV is the percentage of the sale price of a property (or the appraised value in the case of a refinance) – up to which you can borrow. For instance, if you qualify for a 95% LTV you can get a loan for $190,000 based on a sale price of $200,000.

With some loan programs, mortgage lenders place limits on how high of an LTV they will approve if your credit score is below a certain level, especially for “non-conforming” loan products like jumbo loans. A lender may allow you to borrow up to 95% of a property value with a credit score of 750, where they may only give you up to 80% of the property value with a credit score of 650.

Credit Scores Affect the Leniency of Underwriting

A healthy credit history can make up for other weak spots in your loan application like cash reserves, income, or a down payment. A poor credit history usually means that the lender will stick to published lending requirements. The higher your credit score you have at the time of application, the more flexibility you will have on other requirements like the down payment or length of employment.

You May Not Qualify for Certain Programs

With a significantly impaired credit history, a lender might exclude you from participating in certain loan programs. This is more common with non-conforming loans which are issued by non-agency lenders that can set their own rules. These lenders often prohibit loan approvals with credit scores below a certain level, especially with loans for investment properties or second homes. These types of properties involve additional lender risk so lenders often only approve mortgages on these properties with minimal credit risk. 

With 25+ years’ experience, Nancy Hibler will help you find the perfect home for your family. To learn how Nancy can help you buy or sell homes and property, you can visit her website or call today (815) 263-5791.