Concerns about credit scores are up. Many people are beginning to recover from the economic troubles that began in 2008. Simultaneously, the housing market is letting houses go for incredibly low prices. A lot of buyers want the opportunity to own a home. However, even with the low prices that are dominating the market right now, they still need loans to complete those purchases.
With cash, you do not need a credit score of any kind to buy a house. Some of the foreclosed homes coming back onto the market are so inexpensively priced that certain buyers can manage to purchase them outright. Acquiring a house at even a fraction of its original cost, though, is out of reach for most people without assistance from a bank. They need to do whatever they can to impress lenders that they are worthy for a loan and reliable enough to trust to pay it back. Banks are especially skittish about trust right now because so many people have walked away from their mortgages.
The most important factor in a buyer’s profile for lenders is his or her credit score. This credit score generally falls somewhere between 300 and 800, with the higher number being better. Eight hundred is a perfect score. Credit ratings companies compose your score by reviewing your credit history. They determine how many debts you have and how well you have done at servicing them.
What Credit Score Do I Need to Buy a House?
Naturally, many of the buyers coming into the market right now are eager to know what kind of credit score they need to qualify for a mortgage. There are actually many different items in a person’s economic profile that will impact a lender’s decision to grant a loan. In addition, loans are possible for more people than many borrowers think. The terms of those loans, though, are often less than ideal for people who do not demonstrate sufficient financial trustworthiness.
• A Variety of Factors Involved
A good credit score is not the only factor that lenders consider. Buyers who want to maximize their chances of acquiring a mortgage at a decent interest rate should also present their lenders with some other data that might affect their decision. For example, they might include recent pay stubs to demonstrate their present earning power. In addition, bank statements and tax returns will also be helpful.
It would not even be uncalled for to bring in an assortment of monthly bills to show a lender just how much a borrower pays every month. This would show the lenders how much money is left over every month and assure them that the buyer can pay the monthly mortgage comfortably. Essentially, buyer should not be afraid to bring in any data that clarifies their financial situations, including lists of assets and liabilities.
Lenders do not like murkiness in a potential borrower’s profile. That is why even bringing in evidence of financial liabilities might be helpful. It keeps the lender happy to see the whole picture and might build trust.
• Types of Mortgages
Potential home buyers can choose to apply for two different types of mortgages. A fixed-rate mortgage maintains a single interest rate for the entire life of the loan, no matter what happens in the market or to interest rates nationally. An adjustable rate loan has an interest rate that alters according to the movement of the interest rates associated with Treasury bonds.
A fixed-rate mortgage may be for 10, 15 or 30 years. Some have an even longer duration. Buyers who choose these loans prefer the knowledge that their rate will be the same for the entire length of the mortgage. Their goal is usually to lock in the lowest possible rate at the beginning so that they do not regret the terms of the loan later when national interest rates go down.
Adjustable-rate mortgages are initially set at wherever the interest rate for Treasury bonds is set. Buyers choose these rates because they are counting on rates to stay low or at least remain low for the majority of the time they have the loan out. These loans are subject to hikes in the rate, however, if national rates go up.
Credit scores will be important, no matter which type of loan buyers choose to seek. They will have an effect on the starting point for adjustable-rate mortgages and for the set rate placed on fixed-rate mortgages. The importance of these rates cannot be overstated because even a quarter-percent one way or the other can mean thousands of dollars saved or lost over decades.
• Other Impacts on Credit Scores
Even if buyers have done an excellent job of servicing their debt and have not missed payments, they can still get saddled with a lower than ideal score. Making all payments does not earn a perfect score for a borrower. Lenders also consider how much debt a borrower currently has, how many lines of credit are open and what types of credit are in use. About 65% of the total score is derived from payment history and the amount of debt outstanding.
• Its Effect on Mortgage Rates
Given all this, many potential borrowers wonder what impact the credit score finally has on the mortgage rates that they are seeking. To qualify for the lowest rate that a mortgage lender will offer, borrowers typically need a credit score of about 760. Very attractive rates that are close to the best are available to all those who have a credit score of 660 or above. Once the score drops below that level, the interest rates begin to climb significantly. People with credit scores below 580 may have rates as much as four percentage points higher than the rates offered to those with credit scores above 660.
• The Backup Plan
People with low credit scores should not despair. The Federal Housing Administration offers loans that are insured by the government to people who cannot easily qualify for conventional loans. Borrowers can even apply for these loans if they have gone bankrupt or suffered a foreclosure in the past.