Know The Credit Score Needed To Purchase A Home

Knowing the credit score needed to a purchase home before applying to a mortgage cab save you thousands of dollars. Current interest rates are down again thanks to recent action by the federal reserve. While this may be good news for those borrowers who are considering or currently have an adjustable rate mortgage, this news has little impact for those borrowers who are considering a home purchase using a fixed-rate loan. However, your credit score does have an impact on fixed-rate mortgage rates.

Your credit score is used in numerous ways but one of the most common is when you are applying for a home mortgage. Many consumers are unaware of the impact of their credit scores on home mortgage rates. In addition to a good score allowing you to pay a lower interest rate, your credit score may also impact the premium you pay on your home insurance. Taking the time to know the credit score needed to purchase a home to improve it before applying for a mortgage can save you thousands of dollars a year.

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Average Home Mortgage Amounts

According to FICO®, current average mortgage amounts nationwide are approximately $300,000. The higher your FICO® score, the lower your interest rate. The difference can be as much as $300 per month between an excellent credit score and a fair or average FICO® score.

The Impact of Credit Scores on Your Mortgage

While many lenders will not accept a credit score of lower than 620 for a home loan, there are some first-time home buyer programs where borrowers are able to finance their first mortgage with a credit score as low as 500.

Under the current FICO® scoring policy, borrowers with a credit score between 620 – 639 may typically see a $300,000 30-year fixed-rate, or 15-year fixed rate mortgage for as low as 5.078 percent. This translates to a monthly payment of approximately $1,625. Keep in mind, this amount is before you pay taxes on the property, homeowners’ insurance, and private mortgage insurance which is required for any loan which is more than 80 percent of the value of the property. Here’s what you can expect based on your credit score:

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15-year or 30-year Fixed Rate Mortgage

Credit Score            APR                Principal Payment

620-629                      5.078               $1,625

640-659                      4.532               $1,526

660-679                      4.102               $1,450

680-699                      3.88                 $1,413

700-759                      3.711               $1,383

760-850                      3.489               $1,345

Please note these rates are as of 11/12/2019 and are subject to change. Borrowers may learn other factors than their credit score could impact the rate they obtain for a mortgage. FICO® also includes the following disclaimer “For scores above 620, these APRs assume a mortgage with 1.0 points and 80% Loan-to-Value Ratio. For scores below 620, these APRs assume a mortgage with 0 points and 60 to 80% Loan-to-Value Ratio. Assumes mortgage is for a single family, owner-occupied property.”

The High Cost of a Low Score

One of the first steps you should take when considering the impact of your credit score over the life of your mortgage is to review the loan using a mortgage calculator. This calculator helps you understand the impact of your credit score on how much you will pay over the life of your loan in interest payments. Here’s a breakdown of a $300,000 mortgage based on the rates displayed above for a 30-year mortgage:

Credit Score            APR                Total Lifetime Payment

620-629                      5.078               $584,925

640-659                      4.532               $549,274

660-679                      4.102               $521,981

680-699                      3.88                 $508,165

700-759                      3.711               $497,777        

760-850                      3.489              $484,306

As you can see, the difference you will pay if you have a “fair” credit score (620-629) and an excellent credit score (760-850) is slightly more than $100,000 over the term of your mortgage loan.

Even a minor improvement from a credit score of 650 to a score of 655 can have a significant impact on what you can expect to save on your mortgage. This difference of only five points shows you could easily save around $25,000 over the life of your loan. This is how important knowing the credit score needed to purchase a home before you apply is in order to save money on your mortgage.

Improving Your Credit Score

When you are considering purchasing a home, the best option you have is to work on your credit score before you apply for a mortgage. Before you apply for a mortgage loan,  find ways to improve your credit score that work for you. This process will allow you to qualify for a better interest rate on your mortgage and helps strengthen your financial future.

Taking the time to review your credit report can be helpful if you are considering applying for a mortgage. Before you make an application, you should understand the impact of inquiries on your credit score and avoid other common mistakes made by new home buyers.

Your home will be a major investment, one of the most significant you will make in your lifetime. Make sure you do everything possible to improve your credit score, learn about programs which can help you learn more about the home buying process, and make sure you are not buying more home than you can afford.

Taking the necessary time to review loan programs which are available, improve your credit score, and take the time to make sure the home you buy is right for you and your family can help ensure you are making the most of your opportunities to become a new homeowner.

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