By now, you’re probably aware that your credit standing can have a direct impact on your mortgage rate. Did you know that your overall credit history can also affect your home loan - raising or lowering how much you’re required to put down or the price of private mortgage insurance based on how strong your credit score is?
While it’s not impossible to purchase a home with poor credit, it does make the process much more costly. There are other factors that your credit score can influence when it comes to the mortgage application process. For example, if a lender deems you a risky borrower, it’ll have a negative impact on how much funding you can borrow, the types of mortgages you qualify for, and how much your interest rate will ultimately be.
Here’s a deeper look at how your credit score can affect your home loan.
The mortgage lending process is largely dependent on risk-based pricing - a.k.a. Lenders will raise the cost of your mortgage for any risk uncovered in your credit report. The difference between having a credit score of 625 versus 750, is that it could add a half of a percent or more to the rate you’ll be obligated to pay for your loan.
That means you’ll have higher monthly payments with a lower credit score. While it may not seem dire in the short-term, when you add up the cost difference between the two scores over the lifetime of your loan, you could be looking at an extra $20,000 to $30,000 owed.
Credit History & Your Loan-to-Value Ratio
Journeying beyond pricing, your credit history can also come into play when determining home much you’re eligible to borrow for your home. This is known as loan-to-value ratio (or LTV) and refers to the percentage of a property’s sale price that you will be permitted to borrow up to. For example, if you qualify for 90 percent LTV, you will be granted a $180,000 loan on the home’s sale price of $200,000.
You May Not Be Eligible for Certain Programs
Let’s say your credit history has taken a real beating. Sometimes life happens and unexpected expenses, medical bills, or unemployment occurs. It’s easy for things to slip through the crack and pile up until you’re faced with one ugly-looking credit score. I can happen to anyone. However, when it does, a lender may choose to exclude you for certain loan programs.
Conventional financing services, such as Freddie Mac or Fannie Mae, for example, won’t approve a mortgage loan if you hold a credit score lower than 620. This is even more true for those seeking a loan for a second home or investment property. Since these types of properties require the lender to take on additional risk, they want to align with those who possess high credit scores.
Now that you’re equipped with this knowledge, it’s vital that you do everything within your power to optimize your financial picture and work towards improving your credit history. Taking the necessary steps to rebuild your credit score before applying for a mortgage loan can mean the difference between being approved and being denied. Or, being approved with a high-interest rate versus receiving a standard interest rate. Don’t you want to conserve as many dollars as possible?