Buying a new house can be an interesting point in your adult life; however, many home buyers are unaware that their credit scores can adversely affect the process. It can limit the amount of cash a bank will lend you and can also make you ineligible for decent loan terms. Credit scores can impact the home buying process in the following ways:
Loan amounts
It can be easy to fall for a house that you can’t afford, so it is better to be aware of what you can afford. Your credit score could limit how the amount of money you could potentially borrow for any given property. Mortgage lenders will look at your credit scores along with several other factors to determine if you will qualify for a loan.
The other factors, such as how much money you make, can decide how much money you are qualified to borrow. These factors assess how much of a risk you are to the back and how likely you are to pay the loan back in full. In most cases, lower interest rates are given to those with low potential risk.
The amount of cash you are qualified to borrow is also referred to as the loan-to-value ratio, otherwise known as LTV. LTV is calculated as the percentage of the home’s value that you qualify to borrow. If you have a higher credit score, you should be eligible for a higher LTV.
Mortgage types
There are also several different types of home mortgages that you can qualify for. The most common ones are referred to as conventional or fixed-rate, interest-only, adjustable-rate mortgages, FHA loans, or even VA loans. Depending on your credit score, you may qualify for any number of these loans. Your score will also affect the terms you are offered for each one.
In some cases, the difference between a score of 620 and a score of 720 can amount to a half percent difference in interest. This seems small; however, in the long run, the higher rating will end up saving thousands of dollars.
Sometimes the difference between credit scores in the 600 range and credit scores in the 700 range could equal about half a percent in interest. It may seem small, but in the long run, you may end up paying hundreds or thousands of dollars more.
If you happen to have a lower credit score, fear not. There are a few individual mortgages that are intended for people that have less than glamorous scores. For example, FHA loans were created to help first-time homebuyers with little to no credit history qualify for a home mortgage.
Down payment
One of the most significant factors your credit score can have when trying to purchase a house is the amount of the down payment. Most mortgages will require a minimum down payment of 20% of the asking price of the home. If your credit score is high, you will have a lot more flexibility on how much you are required to put down. Conversely, the lower your score is, the more you will have to fork over initially.
Private mortgage insurance
After you consider mortgage rates and the down payment, credit scores may also affect how much you will need to pay for private mortgage insurance. Also referred to as PMI, private mortgage insurance is what insures the bank, should you not be able to make payments or default on the agreement.
Most institutions require PMI in the instance that your down payment does not meet the 20% requirement of the purchase amount. Credit scored affects PMI in the same way that they affect your interest rates or approval odds. Your credit score is quite crucial to securing a loan, so it should be frequently checked for accuracy and monitor for fraudulent activity.
In Summary
If you have a lower credit score, it could potentially affect the amount of money a lender will give you to purchase a home. It can also lead to higher PMI or interest rates. If you are looking for San Francisco homes for sale, be sure to check your credit score first.
Whenever you commence the home buying process, it is essential first to check your credit score. You should also review all of the information that is reported to make sure it is accurate. The three nationwide credit bureaus are required to issue a free credit report to you every 12 months, so it is wise to monitor it often.
No one knows more about credit scores and securing home mortgages better than Team Hatvany. Contact them at 415.345.3022.