Are you looking to buy a home and are wondering what is the best credit score to have?
Many home buyers are taking mortgages thanks to the current low interest rates, some which go as low as 3 percent.
However, before applying for a home loan, you should ensure you have a credit score and that you are financially ready for the obligations you will be entrusted with. This is especially critical if you want to get a loan at the lowest interest rates.
The three digits on your credit score can make or break your home loan application. Most people do not think that an extra percentage point on their interest rate will make a difference. However, nothing can be further from the truth. With interest rates, every point counts.
What Credit Score Will Make You Eligible for a Home Loan?
In the past, majority of lenders required consumers to have a minimum score of 720 to qualify for low rates. However, nowadays most lenders require borrowers to have a score of at least 740. A score of 620 is the typical minimum score required by lenders to provide conventional loans. You can obtain these loans from nearly every financial institution and are not insured by the government. If your score is in the 600s, you will be charged higher interest rate than borrowers with higher credit scores.
People with poor credit can apply for government-backed FHA loans. The loans typically require borrowers to have a minimum score of 580.
How Much Interest Should Your Expect?
Before you apply for a home loan, you should take steps to improve your credit score to get it above 650. This way, you will be sure of better interest rates and lenient terms on your loan. One of the ways you can improve your credit is through the help of a credit repair company like Sky Blue. You can read review of Sky Blue here.
You can still get a home loan if your credit score falls between 600 and 650. However, you may need to take advantage of government backed mortgage plans to qualify. Your best option at getting a home loan with a fair credit score is from lenders who offer FHA loans.
If you apply for a home loan but have fair or bad credit, you should expect to be charged high interest, unless you provide a significant down payment. For example, if you are buying a home valued at $300,000, your rate can be as high as 6.5 percent while a person with good credit may be charged 4.5 percent.
At a rate of 6.5%, you will pay $1,400 per month or a total of $488,000 for a home loan of $300,000. On the other hand, an interest rate of 4.5% will mean you will pay $1,100 per month or a total of $397,000. The difference between the two is a whopping $92,000 over the term of the loan. This is why it is crucial to repair your credit score before you apply for a home loan.
Even if you qualify for a loan at this time, it is wise to wait until your credit score improves so that you can qualify for a lower interest rate. If you really have to buy a home now, consider refinancing it a few years down the line.