Preparing to purchase a home is challenging, you’ve got to find the right location and the right kind of property that will fulfill your family’s needs. But there’s another issue your need to take into account—what type of credit score and history will help you qualify for a mortgage. Below are some things you should consider:
FICO Score Impacts Interest Rates
Whether you’re applying for a government backed loan or a conventional mortgage, your FICO score will impact what type of interest rate you receive. Take a look at the chart below:
| FICO Score | Interest Rate |
|---|---|
| 760 to 850 | 5.780% |
| 700-759 | 6.002% |
| 660-699 | 6.286% |
| FICO Score | Interest Rate |
|---|---|
| 620-659 | 7.096% |
| 580-619 | 8.583% |
| 500-579 | 9.494% |
Generally speaking, your credit score can make a one to four percent difference in how much you pay in mortgage interest
How to Improve
If your credit score will not provide you with the type of mortgage you want, there are some things you can do to improve it.
- Pay down large debts. Since credit bureaus look at your debt to income ratio to help determine your FICO score, paying down your large debts will help. Start with your “freshest” accounts such as credit cards that are actively used and begin to pay off the debt. Do not attempt to pay down debt that’s “old” before tackling you newest debts.
- Pay on time. When you’re in the market for a home mortgage, be sure to pay all of your debts on time. Late payments can have a negative impact on your FICO score. Conversely, if you’ve had a habit of making late payments, consistently paying on time now will help improve your credit score.
- Don’t close credit accounts. Even if you have an account your never use, don’t close it. Your FICO score is partly determined by the age of your credit history. Those old but inactive accounts could be helping not hurting you.
How to Supplement
Sometimes you simply can’t get the FICO score you want due to timing or other factors. However, there are things you can do to mitigate the negative impact of a low FICO score.
- Large down payment. While credit scores are important, cash is even more significant to mortgage lenders because it reduces their risk. If you can increase the size your down payment, you can shave points off your mortgage interest.
- Maintain a large cash reserve. Having cash on hand will help lenders perceive you as less of a credit risk. People who have large cash reserves are empowered to face the inevitable disasters/emergencies of life without going broke or going into debt. This fact alone encourages lenders to offer more reasonable mortgage terms to those people with cash on hand.
- Buy a cheaper home. Many borrowers are frustrated in their attempts to get a mortgage because they can’t qualify for the mortgage amount they need to buy the house they want. By considering smaller/cheaper homes in more affordable locations you can take your current FICO score and qualify for smaller mortgage amounts.
Before applying for a mortgage, carefully consider how your FICO score will affect your chances of qualifying for the interest rate you want.
