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When you apply for a home loan, your mortgage lender will review a number of financial factors to determine your qualified mortgage rate. Obviously, your goal is to get the lowest fixed interest rate possible. A lower mortgage rate will mean lower monthly mortgage payments and less total interest paid over the life of your 30-year mortgage loan.
The Importance of Your Credit Score
One of the most important items your mortgage lender will review is your current credit score (aka “credit rating” or “FICO score”). They will run a credit check as part of your application process. In general, a higher credit score can help you qualify for a lower mortgage interest rate. If you are planning to buy a home in the near future, you should work to improve your FICO score as much as possible before applying for your home loan. This can be achieved by making bills and debt payments on time from month to month. Paying down debts and keeping your finances in order will definitely help increase your credit rating over time.
Can I Buy a House with a Low FICO Score?
You can still qualify for a mortgage loan with a lower credit score. There are home loan programs out there like FHA loans designed to help people with weaker financial health. You may be able to get a home loan with a FICO score as low as 500 if you are making a larger down payment and your other financial indicators (such as existing debts and current income) are strong. Your credit score is just one of the items your mortgage lender will review to determine your loan eligibility and lock in your qualified mortgage rate.
You can definitely help your mortgage rate by lowering high-interest debts and saving up more cash to use toward your mortgage loan down payment (or to spend on discount mortgage points). Still, a higher credit score will always be beneficial when applying for a home loan. It shows you are good at making your payments on time and in full. It means you present less of a risk for falling behind on your monthly mortgage payments and defaulting on your loan. Whether you are applying for a conventional home loan, an FHA loan, a VA loan, a USDA loan or any other type of mortgage or home refinance loan, you will almost always benefit from having a higher credit rating.
What If I Don’t Have Credit?
Unfortunately, many people haven’t really established a credit score or their rating is low because they don’t have many consumer credit accounts. It can seem kind of backwards to think that you need to have and use credit cards and other lines of credit to establish a higher FICO score. Some people with higher debts may be able to have a better credit rating if they are making minimum required payments on time each month. Meanwhile, there are people with little-to-no debt who have low credit scores because they aren’t utilizing their credit.
If this describes you, don’t worry. You can still qualify for a mortgage loan without having much of a credit history. Your mortgage lender will take all factors into account. If you have a consistent income, strong employment background, low debt and enough money saved up for a good down payment, you should still be able to qualify for a loan and lock in a lower mortgage rate.
Having said this, there are steps you can take to establish your credit history and build up a great credit score. It’s very easy to apply for a credit card, make a few purchases each month and then pay off the balance in full when the bill comes. Paying off your bill well ahead of the due date is another credit-score-building trick consumers can use. You may not need the credit card, but making payments on time each month can actually help you to increase your credit score over time.
Improve Your Credit Score to Decrease Your Mortgage Rate
If you do have an established credit history like most Americans, you will want to work to improve your FICO score as much as possible before you apply for your mortgage loan. This is one sure fire way to help reduce your mortgage rate and minimize how much total interest you have to pay over the life of a 30-year fixed-rate mortgage loan. Adjustable-rate mortgage (ARM) loans will also be affected by your credit score. You will benefit from having a higher credit rating, no matter what type of home loan for which you are applying.
For all your mortgage lending questions in the Atlanta area, and for help in qualify for the lowest possible mortgage rate, contact Moreira Team | MortgageRight today.