For many, buying a home is still considered an important part of the American Dream. Even following the real estate crash, many still want to purchase homes. The idea of “owning” a residence still exerts a strong pull for many.
However, few people actually have the resources to pay for a house with cash. Most homebuyers have to borrow in order to get enough money to buy a home. This type of loan is called a mortgage.
Since lenders are putting up the money for a house in these situations, it isn’t surprising that many of them prefer not to risk a default. As a result, lenders rely heavily on credit scores to determine who gets in the door for a loan.
On top of that, lenders also use credit scores to set interest rates. You are charged for borrowing money, and how much you pay in fees depends on how risky you appear; your credit score is a measure of that risk — a higher credit score means less risk.
Like so many things in the realm of personal finance, the credit score you need to buy a home depends on your individual circumstance. The type of loan you get, and where you get it, matters.
Here are some of the scenarios you can expect to run into if you want to buy a house:
It’s worth noting, too, that a VA loan doesn’t list a minimum credit score. A qualified veteras can therefore apply for a loan — and stand a good chance of getting it — no matter his or her credit score.
Even though you have good enough credit score to get financing for a loan, it doesn’t mean that you are going to get the best deal. Realize that if you just meet the minimum requirement to qualify for financing, you will probably have to pay a higher interest.
The truth is that the minimum credit score required to qualify for mortgage financing isn’t even considered “good.” In the case of a Fannie Mae or FHA loan, the minimum score is actually in “poor” territory. That means that lenders consider you a higher threat of default. In order to protect themselves, lenders will charge you a higher interest rate for your mortgage.
You might pay more than 2% higher if you have a score at the low end of the “acceptable” range. Over time, this can make a big difference in your final payment amount.
If you just figure principal and interest on a 30-year fixed rate home loan of $200,000, the interest rate can make a huge difference:
As you can see, the difference between having excellent credit and just meeting the minimum is almost $100,000 over the course of 30 years. What would you do with that extra money? How could you put it to use if you weren’t paying it in interest?
If you plan to buy a house soon, it makes sense to consider taking steps to improve your credit score. While you might be able to get a mortgage, even with poor credit, you’ll want to boost your score so that you aren’t stuck paying as much in interest.
Photo credit: foilman.
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