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How Credit Affects Home Loans

How your credit card affects home loan eligibility - The Economic ...

When it comes to getting a home loan, you want to be sure that you have the highest possible credit score that you can get. Credit scores have a major impact on your ability to get a home loan. Your credit history does not have to be perfect to get a home loan because homes provide so much collateral. But, you do need to have good credit to get an interest rate that doesn’t massively increase the cost of your home.

Home Loans and Credit Requirements

Stated by a NYC credit repair expert, there are several types of home loans, and they all require some sort of credit history. Different types of loans require different credit scores. For example, to get a conventional loan, you should have a credit score of 620 or higher. A 620 credit score falls into the fair category. A VA loan, one backed by the Department of Veterans Affairs, also requires a minimum score of 620 if acquired through a traditional lender. If you are getting a VA loan through the federal government, no minimum score is needed.

FHA loans are often the loan of choice for people with poor credit. To get an FHA loan, you need 10% down and a minimum of 500 credit score - which falls into the “Very Poor” category. However, if you have a higher credit score of 580 or higher, you can put down 3.5% instead of 10%.

If you are looking to buy a substantial home or piece of property, you will need a better score. The US Department of Agriculture requires a 640 credit score if you are looking for rural properties and farmland. Lenders who provide jumbo loans want credit scores in the 700s. Since jumbo loans are for homes priced over $500,000, the good-credit requirement seems appropriate.

Lowering Interest Rates

When you are buying a home, your credit history can affect the interest rate your lender gives to you. A difference of 1% can affect the total amount you spend on your home. With compound interest, the cost of your home can increase substantially over the 30 years of the mortgage. For example, a $200,000 at 3.5% will cost $323,312 over 30 years. If you increase the interest rate to 4.5%, the life of your loan totals $364,813. That is an additional $40,000 over 30 years, or slightly more than $1000 out of your pocket each year for 30 years.

Fixing Your Credit

It is easy to see how good credit can help you save money throughout a 30-year mortgage. But how do you improve your credit score to get a better mortgage rate and loan? You should pay your accounts on time and do not exceed 30% of your total available credit. You should also look at your credit report and fix errors on it. Then, only look for home loans within a 30-day period so the number of creditors looking at your credit will be low.

Know that your credit is not the only factors lenders consider. They also look at your income, your work history, and how much down payment you have.

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