It’s no secret that when you apply for a mortgage loan, both your credit report and your credit score are considered by the lender as to whether or not your mortgage application will be approved. A poor credit score as well as credit problems can result in your mortgage application being denied.
Credit history items such as public records that indicate past financial trouble including collection accounts, bankruptcies, judgments, and liens can also result in your mortgage application being denied. Even carrying a high balance on your credit cards and closing old credit card accounts can both adversely impact your credit score.
Lenders view your credit report and your credit score as an indication of what type of risk you will be to them. A credit score of less than 600 may keep you from getting approved for a home loan. While the Federal Housing Administration requires a credit score of at least 580 for an FHA home loan, you will need a score of at least 620 to get a conventional mortgage loan.
Your credit score directly affects the interest rate of your mortgage. The higher your score, the lower your rate. And the lower your interest rate is, the more home you will be able to afford and the less you will pay over the lifetime of the loan.
Many people know that poor credit will impact your mortgage interest rate, but what some people don’t realize is that poor credit can also affect your homeowners insurance. According to a recent report from Bankrate.com, in conjunction with insuranceQuotes.com (links), homeowners with poor credit pay 91 percent more for homeowners insurance than people with excellent credit. Homeowners with median credit pay 29 percent more than those with excellent credit.
Another thing to consider when applying for a home loan, particularly if you intend to use two incomes for qualify for a mortgage, is your spouse’s or partner’s credit. Even if you have perfect credit, but your partner has poor credit, your chances of getting a good interest rate or even being qualified for a mortgage can be adversely affected.
If you have poor credit, working on your credit score before applying for a mortgage will be worth the time. In the long run, good credit will save you money, it can expand your opportunities, and it can increase the amount of home you can ultimately afford.