We all know that your credit score plays an integral part in determining your mortgage rate. But, your credit history can also affect things like your down payment, how much you borrow and the price for private mortgage insurance. While most may think it is impossible to buy a home with not-so-great credit, it is. It is just more expensive and here’s why.
When it comes to the usual conventional financing, it is recommended to have a credit score of at least 620. The higher your score is, the better the terms will be.
This is why we stress the significance of understanding your credit score months before you apply for a mortgage. If you have damaged credit, you will want to work on improving your credit score and history before you go to apply. If you already have good credit, you will want to keep it at a high score and avoid taking on other additional debt.
Let’s look at some of the ways your credit score affects mortgage rates:
Risk-Based Pricing
The majority of mortgage lending is solely based on risk-based pricing. This means that lenders will increase your mortgage costs for almost every risk associated on your credit profile. Usually, the lower your credit score is, the higher rate that you will have to pay on your mortgage loan.
For example, the difference between a 620 credit score and a 755 credit score could potentially add a half of percent to the rate that you will pay. The 620 credit score could result in monthly payment that is higher by $50+ per month. If you take that by a 360 month term, you will be paying much more over the life of the loan.
Use our loan calculator to see how different payments and interest rates affect your loan.
Loan-to-Value Ratio
Beyond pricing, your credit history can sometimes affect how much you can borrow on a specific property. This is referred to as the loan-to-value ratio (LTV). It is the percentage of a property sale or appraised value in the case of a refinance that you will be allowed to borrow up to.
Let’s say you qualify for a 95% LTV, this means that you can get a loan of $190,000 on a price of $200,000.
Under certain programs, mortgage lenders will limit the amount of how high they will go on the LTV if your credit score is below a certain level. This includes non-conforming products and jumbo loans.
Credit Scores Can Determine some Leniency
Unfortunately, your credit history is not the stand-alone be all issue in the approval process.
A strong credit history can allow lenders to be lenient in other areas where you may not be as strong, such as income or a down payment. On the other side, a poor credit history pretty much guarantees that the lender will adhere to the requirements in these areas.
The higher your credit score is when you apply for a mortgage, the more flexibility you will have in other areas such as length of employment and down payment.
Final Thoughts
Keeping all of this in mind months before you go to apply for a mortgage will only help you in the long run. If your credit score is not the greatest, try to improve it as much as possible so that a lender can see you have made the right steps to be approved. A difference of 100 points on your credit score could cost you or save you thousands of dollars. When you are ready we are here to help, give us a call at Mid America Mortgage.
