Our credit score determines a lot of things we are able to do with in our financial lives.
Without a good credit score, we might have problems getting credit cards, get a decent deal on our auto loan and so on.
A good credit score enables us to get a decent mortgage so we can buy a house for ourselves and our families.
But, what if our credit score simply is not good enough to get a deal that is acceptable for our current financial situation?
Credit scores can mean the difference between a mortgage and down payment that we pay with ease, and one we’re going to struggle with.
Financial decisions are the cornerstone of our modern lives. Not handling our finances, the proper way, may cause our credit score (and thus our credit worthiness) to crumble.
This is a vicious circle and we should avoid bad financial decisions not only when considering to buy a house, but every time we use our credit card.
Because this is a very important topic for many of us, we want to break the whole credit score thing down to some basic elements in order to give you a glimpse at what it means to have a “good enough” credit score to buy a house.
Credit Scores and Lenders
Credit scores are a numeric value that determines the amount of your trustworthiness in paying back the amount the lender is willing to give you. You have a good credit score if you have a good payment history, debt payment on time, a decent and steady income etc. All of these factors are taken into account when your credit score is calculated. The standardized formula used by many banks and lenders is called the FICO score. It is an algorithm that determines your personal credit score based on all of the financial decision you’ve done in your life.
This may sound a bit scary at first, but once you get a bit more into it, you’ll see that this FICO score is rather handy not only to the lenders but also for you. If you know that you FICO credit score is simply not good enough to land you a good deal on a mortgage, you can attempt to improve it.
This improvement can be done by changing up some of the financial habits you’ve acquired over the years. Hopefully, there are no big debts and problems financial wise, so improving your credit score can be taken on with ease.
All you need is an assessment of your current credit score status. There are plenty of services online that can help you with credit score reports and analysis, so you can start improving your credit score from the comfort of your home. To check your free credit scores now visit Cafe Credit.
How do credit scores affect interest rates?
Lenders and banks are businesses. We have to get this into our heads. They’re not charities that want to help, they’re businesses that want to make money. When they grant you a mortgage, they’re expecting to make a profit over the years through interest rates you’re going to pay them. These interest rates are determined by your credit score. If you have a bad credit score, the lender might still give you a loan or mortgage, but he or she has to have a bit more security by doing this. That’s why they put a higher interest rate on your loan, because they’re engaging in a bigger risk by giving the loan to someone with a “bad credit reputation”. However, if you have an excellent credit score, the lenders think of you as someone who can pay back the loan with ease, and thus offer you a great deal so you do business with them.
What credit score do I need for buying a house?
You can get a mortgage with a credit score as low as 500 points. However, you should be prepared for some very high interest rates in this case. It is safe to say that, if you have a credit score between 500 and 600, you should reconsider getting a mortgage at all. Only if it is absolutely necessary and there’s no other way, a mortgage with this credit score would be even considered. And, if you decide to do that, be certain that you can handle the monthly payments so you don’t get sucked deeper into the vicious circle of bad credit scores.
With a credit score between 601 and 699 points, your mortgage will be affected with interest rates 4-10% higher than the lowest available rate for the mortgage you’re applying for. This means that, if the lowest mortgage rate possible is 10%, you might get a rate of 11%-14% with the credit score you have in this example.
A credit score of 700 and higher will land you in the golden zone of loans and mortgages. You’ll probably get the lowest rates possible and thus getting the best deal possible. However, if you’re lucky enough to land such a good deal, be aware of the potential risks it entails. There are many cases in which people with excellent credit scores get loans and mortgages, only to then fall behind on their payments and damage their credit scores for good.
Improve your credit score before applying for a mortgage
One of the best tips we can give you regarding your credit score, is trying to improve it with all means you have at your disposal. Every time you’re applying for a mortgage, it can affect your credit score, so don’t simply rush into applying for one before checking what you can do to improve your odds in getting a good deal.
While credit scores may be tedious when trying to buy a house, they’re there for a reason. Understanding that reason is one of the first steps towards finding an incentive to improve you own credit score. A rule of thumb should be not to consider applying for mortgages if your credit score is lower than 650, as you will definitely get a lousy deal out of it.