Owning a home is one of the most efficient ways you can increase the value of your overall net worth. In fact, some people choose to purchase multiple properties solely for this purpose.
For the average person, though, there are a series of obstacles to overcome when purchasing a house. One of the most prominent is securing a loan, which your credit score can affect.
Not sure what credit scores you need to buy a house? Let’s explore the factors at play.
How Does My Credit Score Affect Me?
A credit score is a value that lies between 300 and 850.
This credit score range determines many different aspects of your life. For those who are unaware, your credit score is more or less a rating of how financially responsible you are.
If you have a high score, it shows potential lenders that you are likely to make your payments on time and maintain a steady source of income. A low score, on the other hand, could convey that you are fiscally responsible.
As you might assume, lenders avoid giving money to those who are not liable to pay it back under the agreed-upon terms. So, having a poor credit score could easily cause you to receive rejections from multiple different lenders while looking for home financing.
Is It Possible to Buy a House With Poor Credit?
It’s not impossible to purchase a house with poor credit. However, it will likely be much more difficult.
There are also other nuances that you need to keep in mind. For example, obtaining a loan while you have a poor credit score will likely come with unfavorable terms. More specifically, you may have to accommodate higher fees and interest rates.
Even a single percentage increase in your interest rate could translate into tens of thousands of dollars over time. The good news, though, is that there are loans specifically designed for those who do not have the highest credit score. These can be great opportunities to take advantage of if you find yourself struggling to find a lender.
Keep in mind, however, that the terms will be a bit more rigid compared to conventional loans.
What Credit Score Do I Need?
It’s technically possible to secure a loan with almost any credit score.
However, the threshold that most people aim for is 620. This is more or less the unofficial cut-off that lenders used to decide if someone is suitable for a loan or not. It shouldn’t come as a surprise that you become more likely to secure funding the higher your score is over 620.
Those who have a score in the 700s are unlikely to encounter many issues when looking for financing options. So, be sure that you run a free credit score check to determine how suitable of a candidate you are.
This can end up saving you a significant amount of time.
What Other Factors Contribute?
It’s important to acknowledge that there are other factors related to how easy it is to purchase a home. One of the most prominent is your income. Those who have particularly low incomes will find it much more difficult to acquire a mortgage loan compared to those who make a significant amount of money.
However, having a high income can help offset having a low credit score. Although you may not be the best borrower on paper, you will show lenders that you have the money to make your payments. Similarly, your debt-to-income ratio also plays a large role.
This is simply a number that denotes the total value of your assets compared to the total amount of money that you owe in debt. In some cases, this can even make someone who has a high income an unsuitable candidate for a loan.
Lenders also sometimes check your savings account and employment history. If you only have a little money in your savings and you tend to lose your job every six months or so, your chances of success will be slim.
Finally, it’s worth considering that lenders take your overall credit profile into account in addition to running a credit score check. This means they will check your entire credit history and look for instances of bankruptcy, unpaid debt that went to collections, etc.
What Else Do I Need to Know?
To maximize your chances of getting a mortgage loan, there are certain steps you can take. For starters, you could look for a cosigner.
This is an individual that will assume the responsibility of the loan in the event that you do not satisfy the terms. So, if you can no longer make payments on your mortgage, your cosigner will be obligated to do so.
You can also expedite the process by gathering relevant financial documents. This will allow you to receive your answer from your lender as quickly as possible.
Not quite sure how you can go about getting a mortgage? You can check out this resource for more info.
Having a High Credit Score Can Help You Significantly
Otherwise, lenders may simply not believe that you are a trustworthy borrower. If you’re having trouble finding a mortgage lender to work with, do what you can to increase your credit score over time.
This will help ensure that you maximize your chances of success.
Looking for more tips that can help you out later on? Check out the rest of our blog for plenty of more useful information.