When buying a house, a buyer’s credit score is a major factor. It can mean the difference in being approved for a loan or denied. Even if the loan is approved by a lender, a bad credit score – or even one that is mediocre – can cost a borrower a lot in interest. In fact, most borrowers see an additional cost of at least ten thousand to thirty thousand dollars more in interest charges if they do not have an excellent credit score.
Lenders use a credit score to review the history of credit a person has paid or is currently paying. Having a good credit score will tell a lender that the person has always kept their accounts in good standing and they do not have exorbitant amounts of debt that they owe.
When a lender sees a credit score they will use it to decide on the interest rate. Even a few point difference can mean thousands of dollars in interest charges if it bumps a person into the good credit or bad credit category. This is why it is important for buyers to look at interest rates to decide if it is the right time to take out a mortgage.
Besides the interest rate, a lender may use a person’s credit score to determine what down payment they would like to see. High-risk borrowers with a low credit score may be required to put more down than those with high credit scores. They may also see different loan types offered to them.
It is very discouraging to hear about low credit scores and having a hard time getting a loan. However, there are many lenders that are willing to work with a borrower even if their credit is not spectacular. Someone that wants to pursue a mortgage with poor credit does have options, but they are likely to pay more in interest charges.
A good way to get a mortgage without racking up too much in interest charges is to look for a smaller loan. Buying a starter house that may not be a dream house is one option to help boost a credit score. A smaller home will cost less and the mortgage will be less, as well. The borrower can work on getting their score up as they pay towards this loan.
Someone who is struggling to get a mortgage may want to steer clear of big name lenders. The big name chain banks are less likely to work with a borrower who has a poor credit history. Meanwhile, a credit union or even an independent mortgage broker may be willing to work with the borrower to get a loan that will fit their needs.
The smaller lenders are willing to hear out why a credit score is not stellar. They may look past the number and ask why there are late payments or let a borrower explain why their debt to income ratio is so high. If the reasoning is sound they will go to their underwriter and argue why the mortgage should be offered.
When preparing to buy a house, the best thing a person can do is try to improve their credit score. In any situation having a higher credit score is going to help. It can help to lower their interest rate and even stop them from needing a large down payment.
Having a bad credit score does not mean a person cannot get a mortgage but it does mean they will have to work a little harder and pay a little more.