A Perfect Credit Score Alone Won’t Get You a Mortgage, but without Good Credit, Homeownership Will Remain a Dream

By the time you sign the papers to buy your new home, you’ll be frazzled, exhausted and wondering if it was all worth it…and you haven’t even moved the heavy boxes yet. Closing day, though, might be a long way off if your credit score isn’t up to par. While your credit score alone will not determine whether or not you can get the house of your dreams, without a healthy credit score, you’ll be handing money over to a landlord for a long, long time.

Your credit score affects almost every aspect of your finances. When you are applying for a loan, it is standard procedure for the lender to check your credit score. This will be a huge factor in determining if your application will be approved and how much interest will be charged. Credit scores vary from one person to another and are dependent on a number of things. If you want to purchase a property but don’t have enough to pay in cash, then it’s important that you start improving your credibility to lenders.

A credit score is used by lenders to determine how credible or risky you are as a borrower. Credit scores range between 300 and 850, and anything that falls under 620 is considered a low score. Each lender has their own standards, but essentially, any score above 700 is considered a good one. If you are hoping to get a housing loan, then you should at least have a score of 620.

Your credit score is calculated using your payment history, the type of accounts you have, the amount of money you owe, any new accounts, and the length of your credit history. The longer you keep your accounts, the more payments you make on time, and the lower you keep your balances, the better.

Although lenders will consider your income for the loan approval, your credit score does not rely on how much you make. A person making $25,000 a year who has a history of responsible credit use and makes every payment on time can have a higher credit score than someone making $80,000 who has a lot of late payments and high credit card balances. Conversely, having a high credit score won’t guarantee that you will be approved for a large home loan. Even if you have perfect credit, if you only make $25,000 a year, you won’t be able to get a loan for a $500,000 home. You need a strong credit score to get a mortgage, but the amount the lender will approve still depends on your income and your ability to pay the loan.

When you apply for a mortgage, lenders will look into your credit score, income, and debt-to-income ratio. Debt-to-income ratio is the proportion of how much debt you already have, compared to how much money you earn. It is used to gauge how much you can set aside for the mortgage payments. Lenders also compute for LTV or loan-to-value ratio, which is used for lending risk assessment. Ideally, you should have a low LTV to avoid any problems. If your LTV is more than 80 percent, lenders may require you to purchase mortgage insurance to protect them from buyer default.

If you are preparing to buy a new home in the near future, do what you can to improve your credit now. Remember, a good credit score can make the difference between a low interest rate and high interest rate loan. Ovation works with prospective homeowners to help reach their home ownership goals. Contact us if we can help you say goodbye to the landlord.

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