When you are ready to buy a home, you should be prepared for the way that lenders will dig into your credit history. Not only will they want to see that, but they will ask for pay stubs and other proof of income, to see if you are worthy of getting a loan.
Most likely, your home is the largest investment you will ever make. And if you cannot pay cash for it, you will have to borrow from a bank, credit union, or other types of lender. Even though a house does act as collateral in a loan, the lender will want to be sure that you will pay back the loan. The only way to see if you are worthy of their financial risk is to check your credit score.
Why Your Credit Score is Important?
Stated by a credit repair expert, credit scores are based on several factors, but the most important one involves your history of making payments on time. The other factors include how long you have had credit, how much of it you use, and how much new credit you have. Higher numbers are better than low ones.
Your Interest Rate is Affected by Your Credit Score
If you are a safe borrower with a high credit score, you will be able to get a loan with a low-interest rate. However, if you are a risky borrower, your interest rate might be higher than you expected.
When the interest rate is high, that is where more money is out of your pocket each month as you pay your mortgage. Someone with good credit could buy a house for the same price, and then pay less each month because they got a low-interest rate. The interest rate differences could be thousands of dollars over the time of the mortgage.
Can You Get a Home Loan with Bad Credit?
If you have very bad credit or no credit at all, you could have difficulty getting a loan from a traditional lender. If you have bad credit, you might have to turn to the federal government for a loan through the FHA. They require a minimum credit score of 500. Even if you try to get a loan through the government programs, you still have to qualify for it through a lender.
Fortunately for people with bad credit, there are a few other ways to get a home loan. Lenders will look at your work history, assets, and income. Lenders want to see if you have the ability to pay back the loan. If your bad credit comes with weak work history, few assets, and not much of an income, then you might not get a loan.
Don’t Forget About the Down Payment
Your credit score could affect the down payment that the lender requires. Ideally, you could try to put down at least 20% of the price of the house you plan to buy. Traditional loans require this, and lenders will want to know where the 20% came from, too. Lenders like the FHA require between 3% and 10%.