Credit scores affect mortgage rates… We know this, but your credit history, that score, and your basic loan to value ratio and debt to income ratio can all affect mortgage rates as well. It’s not just the one number that lenders look at when deciding on the best mortgage, terms, and rates for you. While it’s not impossible to buy a home with less than perfect credit, it is more expensive. So here’s how your credit score affects your mortgage rates.
Your credit score, that magical number, affects the kinds of mortgages you might be approved for. It also affects how much you can borrow and the mortgage interest rates you’ll pay. When it comes to a conventional loan, most lenders will require a credit score of at least 620 to be eligible for a loan. The higher your credit score, the better the terms and potentially the interest rates will be.
It’s always a good idea to understand your credit score before you apply for a mortgage. If you need to improve your credit score before you apply, continue to pay off any major debt, make on-time payments, and don’t cancel any cards or credit accounts that are completely paid off as it will show that you have available credit without maxing out everything you have.
How Your Credit Score Affects Your Mortgage Rates
Loan to value ratio.
Lenders will look at your credit history to determine a loan-to-value ratio. The credit history, as well as the score, can affect how much you can borrow on a specific property. This loan to value ratio is the percentage of a property sale price or appraised value in the case of a refinance that the borrower can borrow up to. If you’re purchasing a property at $200,000, the loan to value ratio for an 80% to 20% would mean putting 20% down or $40,000 and taking out a loan of $160,000. Mortgage lenders will typically limit how high they will go on the loan to value if credit scores are below a certain amount.
Credit scores can determine the leniency of underwriting.
With excellent credit scores of over 780 or higher, the chances of a default on the loan are very low. Credit history is not necessarily the only factor in determining the approval process. That credit score number is valuable as well. If you have a higher income, substantial down payment, and cash reserves as well as a higher credit score, it can definitely offer you the best terms and rates.
Credit scores can affect private mortgage insurance.
Lenders will require private mortgage insurance if you make a down payment of less than 20%. Lenders do not want real estate on their books so if you default on the loan they may need to take a hit on the sale to get the home sold quickly so this extra 20% will cover that risk or you will have to take out private mortgage insurance. This may be less than $100 a month or so but it can add up.
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