Understanding How Your Credit Rating Impacts Home-Buying

Whether you are a first-time homebuyer or have previous experience, your credit rating significantly impacts the mortgage rate available to you. Lenders look closely at your financial profile to help them gauge the risk of the loan you seek to buy your home. 

Your credit score is a primary indicator of your trustworthiness to mortgage lenders. For them, it is an ideal snapshot of how well you handle your finances. Your credit score will loom as a crucial element determining factor that will save or cost you thousands of dollars during your life. 

Your credit score is more than just a number.

Your credit rating represents a clear representation of your creditworthiness. Lenders use your credit history when calculating your interest rate. They use it to predict the likelihood you will pay your mortgage consistently and on time. Lenders run your credit history through an extensive credit score database to estimate your ability to pay your monthly mortgage.

Did you know your credit report plays a role in how much you pay for a house? Before you begin to search for homes to buy, it is smart planning to check your credit report. Your credit profile includes your income, debts, cash reserves, history of utility payments, and if you pay your other bills on time. By starting early, you give yourself time to get your credit in order by paying down your debt and making all your payments on time. 

How your credit history can impact home-buying

Credit scores are the first thing a lender evaluates when considering your eligibility to buy a home. Think of your credit history as an opinion on your financial health. Your scores impact the mortgage application process, influence interest rates, and affect other aspects of the mortgage-buying process. For instance, your credit score will determine the interest rate on your loan and if you need to purchase insurance to pay off the loan should you default on it. 

The US Department of Housing and Urban Development (HUD) defines a low credit score as less than 620. It considers credit scores of 720 and above as high.

Having credit card debt is one of the most visible indicators that your credit rating is damaged. You’ll see that in the form of an adverse payment history, which means you’ve made more than one late payment over the past twelve months. If you have bad credit, you can expect to pay anywhere from 3% to 12% more on your home mortgage than your credit-worthy counterpart. Your credit history helps determine whether you will need Private Mortgage Insurance (PMI) premiums to acquire your loan. 

What is PMI?

If your credit history has entries for late payments, bankruptcies, or even fraud charges, PMI will increase your monthly payments by hundreds or thousands of dollars. To ensure you pay the minimum required for PMI, lenders look at a range of factors, from your credit score to your debt-to-income ratio. But it all begins with your FICO score. 

The Federal Homeowners Protection Act gives homeowners the right to drop PMI payments. There are automatic PMI terminations for reaching home equity milestones specified by the agency or requesting PMI removal from buyers who have attained an 80 percent or lower home equity ratio. Rising home values and lender rules offer other options to remove PMI. 

FICO Scores 

Your credit score directly impacts your mortgage rate, and it starts with your FICO scores. FICO scores range from 300 to 850, with higher scores indicating a better credit risk worthy of lower mortgage rates. FICO scores come from the three credit rating companies. Equifax, TransUnion, and Experian. Because the data they each pull can have slight differences, the rate your lender uses may not match the FICO score you see from one of the credit bureaus. 

Fannie Mae and Freddie Mac are the government-sponsored enterprises responsible for purchasing many of the mortgages that originate in the US. They set rules for the loans they buy, which typically will override a bank’s policies for types of loans. Lenders comply with the standards set by Fannie and Freddie so they can sell loans off their balance sheet to them. It’s most likely your lender uses the same score as the government agencies.

All lenders require adequate NJ Home Insurance as a condition of the loan. But they leave it to the homeowner to choose where to purchase homeowner insurance. We are here to help and support you. The insurance professionals at Dickstein Associates Agency will evaluate your needs and discuss the amount and type of coverage you need to protect your home against property damage and liability risks. Then we’ll shop it through multiple markets to get you the best insurance coverage at competitive rates. 

About Dickstein Associates Agency

Dickstein Associates Agency has distinguished itself as a leading provider of personal and business insurance in the tri-state area for over 55 years. We pride ourselves on being advocates for our clients and providing them with quality and affordable coverages. As Trusted Choice™ independent insurance agency, we partner with various national and regional carriers, allowing for flexible and unbiased coverage for each client’s unique circumstances. For more information on how you can leverage all of your insurance to work best for you, and how we can secure the best insurance in the marketplace based on your specific needs and business objectives, contact us today at (800) 862-6662.