Although buying a home is one of life’s most exciting milestones, applying for a mortgage loan can be intimidating. Understanding mortgage loan requirements will hopefully give you the confidence you need to take the leap and apply. Lenders look at many aspects of your finances when determining whether or not you qualify for a loan, but the most important factor is your credit score. Find out below why your credit score matters when applying for a mortgage loan and what credit score is needed to buy a house.

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Why Your Credit Score Matters When Buying a Home

A credit score is crucial for some of the most critical moments in our lives: being approved for a car loan, obtaining a credit card, and being hired by an employer. Perhaps one of the most important is purchasing a home. Here are the reasons why your credit score matters so much when applying for a mortgage loan:

It Indicates Credit Responsibility

A mortgage is a big loan, and lenders want to be sure they are repaid what they have loaned. A credit score and report show the lender how you have used credit in the past. A good credit score shows the lender you can pay on time and know how to use credit responsibly. A bad credit score indicates a person may have struggled to be financially responsible in the past, and a lender will most likely not want to risk lending to them. Factors such as a low debt-to-income ratio, timely payments, and age of credit are all part of your credit score and determine whether or not you are approved.

It Determines Your Interest Rate

The better your credit score, the more likely you’ll qualify for a lower interest rate loan and down payment. This is because a lender will offer better terms if they feel more confident the borrower will pay back the loan. A percentage or two difference in interest rate may seem insignificant now, but it can add up to tens of thousands of dollars over the life of the loan. To put it in perspective, the difference between an interest rate of 3% and 3.5% over the span of a 30-year $250,000 loan is nearly $25,000.

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What Credit Score Is Required to Buy a House?

Credit scores in the US range from 300-850. A credit score of 650 is usually considered good enough to qualify for a home loan for most lenders. If you want better interest rates and terms, aim for a score within the 700s and 800s. A credit score below 650 may be denied or result in undesirable terms and high-interest rate offers. While your credit score is the most critical factor when applying for a mortgage, other things are also considered, such as your income, down payment, and existing debt.

If your score needs improvement, sometimes it’s worth holding off on buying a home until you can raise it to qualify for better interest rates. However, if your current credit score is good enough to be eligible for reasonable rates, experts believe you shouldn’t wait as you run the risk of rising national interest rates.

Want to Improve Your Credit Score? Here are Some Effective Ways to Raise Your Score.

  • Pay all your bills on time.

  • Make frequent payments–sometimes called “micro-payments”–throughout the month to keep your credit card balance low.

  • Ask for higher credit limits from current lenders to increase your available credit.

  • Prove to lenders you’re capable of handling multiple types of loans by diversifying your credit.

  • Improve your debt-to-income ratio.

  • Avoid closing out credit sources.

  • Dispute any errors on your credit report.

  • Pay down high-balance credit cards.

  • Avoid opening new lines of credit around the time you are applying for mortgage loans.

  • Try to apply for mortgages within 30 days, as too many inquiries spread out over an extended time can negatively affect your credit score.

How to Qualify for a Mortgage Loan With a Bad Credit Score

Do you have a low credit score and want to purchase a house now? An FHA loan is an excellent option for those with low credit scores or limited savings. Unlike conventional loans, FHA loans are insured by the Federal Housing Administration, so lenders feel more comfortable providing mortgages to individuals with lower credit scores. An excellent option for first-time homebuyers, these loans often require lower down payments. A credit score of 500 and 579 is acceptable to qualify for an FHA loan but will most likely need a larger down payment. As with conventional loans, a higher credit score will lower the down payment and interest rate. 

Get Started On the Mortgage Pre-Approval Process

Ready to find your dream home in New Jersey? At Casa Real Properties, our expert real estate agents are with you every step of the home buying process. Schedule a free mortgage prep meeting today, and our experienced agents will walk you through the mortgage pre-approval process. We’ll use our industry expertise to find the best lender and mortgage rates to fit your needs. 

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About the Author: Nancy Pavic

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Nancy Pavic is an expert in the New Jersey real estate market. For the past 25+ years, she has brokered Casa Real Properties, a well-distinguished real estate office in the Northern New Jersey area. Her prestigious awards include membership into the Top 1% of Realtors, the “Circle of Excellence” award by the New Jersey Association of Realtors, a front page cover spread of Top Agent Magazine, and a recipient of the Mayoral Award for Financial/Real Estate at the 2009 Paterson Women’s History Awards Ceremony.