If you’ve lived anywhere in the U.S. for the past 20 to 30 years, you’ve probably heard that it’s almost impossible to buy a home without a killer credit score.
And while that’s not necessarily wrong, like most things in life, it’s less black and white than that. Add some gray to your picture and then let’s talk about the nuance of credit scores. There are sweet spots, and ways to negotiate difficulties like a road winding through a narrow canyon with bridges and switchbacks. But first you have to know the terrain, and that’s where we come in.
Disappointed or pleasantly surprised by your credit score? Neither response is shocking. Both happen. Let’s dig into a few bullet points on the topic. Once you’ve got a map of what’s possible, you’ll be able to make decisions that are best for you.
Good Credit
Checked your credit score and it was in the astronomical region? Did it almost form a bridge constructed entirely of numerals to Jupiter? Yes? Excellent.
Credit that’s worth crowing about is generally anything over 700, with scores 720 or higher earning the excellent designation. The score itself impacts the interest rate and the type of loan you’ll qualify for. The higher the credit score, the lower the interest rate which informs your monthly payments on the loan.
Mortgage lenders depend on your credit report and the accompanying score to determine if you’ll be reliable and pay back the loan. It’s built through a complex rating system called the FICO scoring model, which is based on reports derived from the major credit reporting agencies.
But how is that determined? As an adult, you’ve probably had the chance to land a credit card, a car loan, or something similar that requires you to make payments on a monthly basis. If you’ve been doing this regularly and on time, you’ll have been building a credit history that a lender can look at to get an idea of how well you’ll work with them to repay the loan they give you to buy the house. A better record translates into a higher confidence in you. The sum of all that is a lower interest rate.
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Lower Credit Isn’t the End of the Dream
Here’s the thing: life isn’t a series of easy to check off milestones with no interruptions or complications. Things happen. Very responsible and decent people have Acts of God befall them. Difficulties arise, which may have left some muddy tracks in your credit report which have therefore impacted your credit score.
There are solutions to situations where less than stellar credit can’t get you the lowest interest rate. Such options include loans that are backed by the government in some way and which may or may not even require a credit score for qualification, though the lenders who originate the loans do. VA Loans, USDA Loans, and Federal Housing Administration Loans are all available for those who qualify. At Academy, with some of these loans, credit scores as low as 640 are acceptable.
Refinance When Your Credit Improves
Experiencing setbacks that impacted your finances shouldn’t prevent you from experiencing the dream of owning your own home. Credit scores fluctuate and that means they can go up as surely as they can go down.
The trick is knowing that many loans that allow for a lower credit score come with what’s known as mortgage insurance wrapped into the final loan. This is a type of insurance that protects the lender. Later on, after it’s possible to refinance your mortgage and you’ve managed to increase your credit score, consider following through with a refinance to lower your monthly mortgage payment.
We’re not the only mortgage experts out there, so we encourage you to do your homework if you’ve decided to buy a house, such as checking your credit report and its score to get an idea of what you’re working with. If you’ve done this, bravo! That’s some serious adulting and we’re impressed.
We’re always here to discuss the possibilities!
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Every situation is unique, but we can find the perfect solution for you!
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Academy Mortgage is one of the top independent purchase lenders in the country as ranked in the 2013 CoreLogic Marketrac Report.