How Your Credit Score Affects Your Home Buying Power

What does it mean when you feel a bit of anxiety before checking your credit score?

I’ve got news for you.

It means you’re human. We all feel a bit nervous when checking our credit score even though 699 is the average credit score in America, according to a 2016 Experian report.

The average mortgage applicant in Virginia had a score of 730 according to the media platform, Governing.

Well, guess what.

According to NAR, 88% of all buyers financed the purchase of their home in 2017. That means very few buyers are paying cash for homes. Queue mortgage lenders and credit checks.

Lenders will consider many factors when determining your creditworthiness and the first of those factors is your credit score. Beyond that three-digit number, they will also take your income, debt, employment history and savings into account.

In a nutshell, here’s the lesson:

Before a bank can loan you hundreds of thousands of dollars they need to assess the likelihood of you paying them back. The best determining factor for this is your past payment history. Don’t go into a meeting with your lender blindly without having some idea of what your score is.

Here’s how your credit score is compiled:

 

There are numerous resources available to receive a free credit report. Review your credit score report to ensure there are no errors.

As if that’s not enough, a good to excellent credit score isn’t all you need to get the ball rolling on buying your next home.

You see, a person could have excellent credit but not enough income to support the monthly payment for a home in a certain price range.

On the other hand, a buyer may have good credit but substantial saving, little to no debt and a well-paying job.

Each of the factors mentioned above will be taken into consideration by your lender when determining how much home you qualify for.

Here’s a quick breakdown of how your credit score can affect your interest rate and monthly payments.

In case it isn’t obvious at this point, your credit score will have the biggest impact on the rate offered to you. Higher credit score= lower interest rates.

Excellent (750-850) – Your credit is excellent and therefore should have little to no impact on your interest rate. You may qualify for the lowest available rate at the time of your loan application.
Great (720-749) – Your credit is considered GREAT! With a credit score within this range, your interest rate should be minimally affected, and you may expect a rate increase of roughly .25% above the best available rate at the time of your loan application.
Good (660-719) – With a credit score in this range there will be a slightly greater impact on the interest rate offered to you. You might expect a rate increase of about .5% over the lowest rate available at the time of your loan application.
Fair (620-659) – Due to your lower credit score your rate will likely be Your rate will have a % higher than the lowest possible rate at the time of your loan application.
Poor (300-619) – If you can get approved for financing you can expect the interest rate to be on the higher end.

Your monthly payments can increase by hundreds of dollars based on a difference of only a few points on your credit score.

Let’s see how a difference of 100 points can affect a buyer’s mortgage payments.

Here’s the scenario.

A potential home buyer wants to purchase a new home worth $500,000 and has a 20% down payment for a 30-year, fixed rate loan of $400,000. They have what would be considered an excellent FICO credit score of 775 and are offered a mortgage rate of 3.645 percent. Not including taxes, insurance or HOA fees this buyer is looking at an estimated payment of about $1824.

 

If this buyer’s credit score drops by 100 points to 675, they now have what would be considered a good credit score. Their rate may increase to 4.138 percent. A rate increase of .49% increased their monthly payment to roughly $1939. That’s a difference of $115 a month and $1,380 over the course.

 

*The above rate and payment estimates are provided by Bank Rate. Remember that the day-to-day movement of rates is going to affect the interest rate you pay, other factors come into play as well: your credit score, the type of loan, whether you purchase points, your down payment and where you live. Please consult a licensed lender to determine current available rates and loans available to you.

Shop around. We recommend speaking with at least two or three lenders licensed in Northern Virginia to see what programs and rates they’ll offer you.

There’s no hard and fast rule for what credit score you need to purchase a home. Many factors are taken into consideration by mortgage lenders with credit score being only one of them. Here are a few available loan programs and the minimum credit score required for each.

• FHA Mortgage: 580
• Conventional Mortgage: 620
• Veteran Affairs (VA) Mortgage: While the VA does not have a minimum credit score requirement, many lenders require a minimum of 620

Well, the good news is while buying a home with a less than ideal credit score can be a challenge you still have options. There are a couple of things you can do to improve your score quickly. Speak with one of our preferred lenders for details.

Bottom line: Your credit score has a huge impact on your buying power but it’s not the only factor.

Give Abraham a call today at 703-539-2053 to discuss the next steps to buying your new home.