Most people have a general knowledge that the higher your credit score the more likely you are to obtain a mortgage loan. But did you know that having a lower credit score doesn’t count you out of the home-buying field?
Here’s how your credit score can affect you in the home-buying process.
How Much Money You Can Borrow
While you may assume you can afford a home in a certain price range by plugging in a few numbers on a home mortgage calculator, it doesn’t necessarily mean that will be the amount you’ll be approved for.
Your credit score can easily affect how much of a mortgage loan you will be approved for. Typically those with a higher credit score versus a lower one will be approved for a higher amount loan. Not to mention, those same people will also see a better interest rate on their loan compared to someone with a lower score.
Types of Mortgages
If you do have a lower credit score, it doesn’t mean you won’t be able to obtain loan approval. Although it may be more difficult, you can opt for loans such as FHA loans that are designated for those with lower credit scores or shorter credit histories and are first-time homebuyers.
With a higher credit score, your loan options will be greater. This means that you will not only have better options to choose from but the ability to shop around for greater deals.
Wherever your credit score lies can also affect how much of a down payment you’ll be required to pay. As you may have already guessed, a lower credit score can lead to higher down payment requirements. With an average credit score, most mortgage lenders require a down payment of at least 20%. This percentage may increase with a lower credit score or you may have more flexibility and a lesser down payment if your credit score is higher.
When you don’t put down at least 20% on your mortgage loan, you will be required to pay for private mortgage insurance or PMI. This is solely for the mortgage lender to make up for the costs in case you aren’t able to make payments on the mortgage. If you haven’t already caught on by now, the lower your credit score is you can expect a higher premium for this insurance and vice versa if your credit score is higher.
Boost Your Credit Score
In conclusion, you may have noticed all of the benefits of having a higher credit score. While a lower credit score doesn’t halt you from owning a home, it definitely can make it more expensive or difficult.
If you haven’t quite boosted your credit score to where you’d like it you may be asking yourself “should I rent or buy a house” and that’s definitely worth looking into. While homeownership has it’s perks, if it is not the best financial move for you at the moment renting can be just as good of an option.