Even though a house is its own collateral, most lenders have credit score requirements before awarding a home loan. Credit scores offer a relatively accurate glimpse of a borrower’s credit history and debt status. Despite the ubiquity of the credit scores, many borrowers do not understand how exactly they work and why they are so important to lenders.
The credit score that most lenders use is called a FICO Score. This score is not the only tool that lenders use to determine credit-worthiness for a loan. They also look at income, debt levels, and assets. So, the exact credit score needed for a home loan isn’t standard. However, there are minimum credit scores needed for some types of home loans.
Credit Scores and Interest Rates
Stated by a credit repair specialist, along with helping you qualify for a home loan, a credit score can affect the terms of the mortgage. If you have a high credit score, then you will most likely get a lower interest rate than someone who has a low credit score. Lenders assign higher interest rates when they find a borrower to be riskier.
Lenders Giving Mortgages to People with Low Credit Scores
It is possible to get a home loan if you have a low credit score. Mortgage loans that are backed by the federal government, like the FHA or VA loans, are more likely to give them to people with low credit scores. There are often concessions that borrowers have to make to qualify for these loans. For example, borrowers with low credit scores often have to make a larger down payment because they are a risk for the lender. And, they can also expect that the lender will give them a higher interest rate.
Fix Your Credit Before Applying for a Loan
If you are looking for a mortgage in Colorado with a low credit score, you might want to wait before you begin applying. The cost of added interest and more money down can be very costly over the time of the loan. But, if you take some time to increase your credit score, you can save money over the 30 years of your mortgage.
There are a few handy ways to improve your credit score quickly. One of those is to get a copy of your credit report and to be sure that everything is accurate. There are three credit bureaus that lenders use, and one might have an error that could be hurting your score. If you find a mistake, all you have to do is contact the credit bureau and let them know. Having the other credit reports will help back up your claim if there is an error.
Another useful thing you can do is to make all of your payments on time immediately. Late payments make a big difference in a credit score, and making them on time will slowly begin to send your credit score in the upward direction. While you are making those on-time payments, do not get any new credit until you have improved your credit score enough to help you get a mortgage you can afford.
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