You probably already know that you need a good credit score in order to obtain a mortgage loan. Credit ratings and mortgages go hand-in-hand. This is especially true since the national financial crisis that unfolded in 2008. Mortgage lenders are have become more stringent about whom they lend to, meaning that the relationship between your credit and your mortgage is more crucial than ever. By understanding the connection between your credit and mortgage, you can work on improving your credit score (if needed) and securing the best mortgage rate .
Credit and Mortgages: Getting the Best Interest Rate
It is important to realize that you will need reasonably good credit if you want a mortgage to begin with. If your credit score is currently below 650, it may be extremely difficult to get approved for a home loan. (Note that FHA loan programs do accept some borrowers with credit scores below 600, but it will cost you more to partake.) If your credit rating is strong enough to qualify for a mortgage loan, the next step is to secure the best possible mortgage rate.
Your mortgage interest rate will reflect the strong correlation between your credit score and mortgage. Indeed, not everyone is offered the same mortgage rate. Having a solid credit score gives you more borrowing power, and only the borrowers who are viewed as an acceptable risk will be offered the best rates. In order to qualify for a low mortgage rate. you will likely need a
credit score of 740 or higher.
If you have a good credit score (generally between 700 and 740) you can still get a decent interest rate on your mortgage. However, while a score of 700-740 is considered good, it is not the best. The credit and mortgage connection means that you will not get as good of an interest rate as someone with a score above 740 would get. This is because you are viewed as a bigger risk for loan default.
Once credit scores drop below 700, the mortgage interest rates start to creep up to compensate for the lender’s risk. A person with weak credit may not be able to get a loan at all. Mortgage lenders have to make their decisions based on your potential strength as a borrower ; therefore, with a poor credit history they essentially see irresponsibility and failure to repay debts on time. While you may be able to get a mortgage even with bad credit. you will likely be penalized by paying a higher interest rate.
Due to the importance of the credit and mortgage relationship, it is a good idea to concentrate on improving your credit score before you apply for a home loan. Make all your bill payments on-time and in-full, and also do what you can to reduce your overall debt. Responsible financial behavior can boost your score so that the connection between your credit and mortgage works in your favor, possibly saving you thousands of dollars in interest.