6 Reasons Why High Credit Scores Help People Qualify for Low Rate Home Loans
US consumer credit scores hit a high in spring 2017 as the number of Americans who are considered to be risky home loan applications hit an all-time low. This change could lead to more mortgage lending activity with more people qualifying for home loans with amazing interest rates.
Higher credit scores for the average US consumer indicates that unemployment is falling, and the economy is growing. Also, it has been almost 10 years since the mortgage meltdown, and this has helped more people to clear up their finances.
In larger numbers than ever, foreclosures and bankruptcies are falling off of the credit reports of millions of Americans. A recent study found that at least six million Americans will have Chapter 7 and Chapter 13 bankruptcies fall off their record in the next 60 months.
The average FICO score hit 700 in April 2017; this is the highest average score since 2005. At the same time, the number of consumers that are thought to be the highest risk, with a score under 600, hit an all-time low of 40 million.
As people's FICO scores go up, many lenders are more likely to offer credit to more consumers at a lower cost.
It is good for millions of Americans that average credit scores are going up: Having good credit makes getting a low rate home loan. Below are some of the best reasons why this is the case:
#1 More Power to Negotiate
A good FICO score gives the borrower more leverage to negotiate a lower rate on your new home loan. If you want to increase your bargaining power, you may want to mention excellent, low rate offers you have gotten based upon your score. However, if your score is low, creditors considering you for a home loan will probably not negotiate much if at all.
#2 Get Higher Limits
Your ability to get a home loan is based upon your level of income and your FICO score. A major benefit of a good credit score is that mortgage lenders are willing to let you borrower more because you have shown that you pay your debts. You can still get a home loan with bad credit, but you probably will get a lower limit.
#3 Higher Chances for Home Loan Approval
With poor credit, many people will avoid trying to get a home loan because they think that they will not be approved. For a conventional loan with 20% down, you tend to need a credit score well above 680 to qualify for a home loan.
If you have credit above 740, you will usually get the best home loan rates. What many do not realize is that those low mortgage rates you hear so much about are only for the best qualified borrowers.
However, remember that you do have a chance to get a decent home loan at a low rate with an FHA loan. This is a government backed mortgage that some lenders will extend to people with poor credit. The lenders are approved by FHA to lend, and they are willing to do so because FHA will pay them back if you do not pay your loan.
So, while having a high FICO score makes it easier to be approved for a home loan, there are other options.
#4 Lower Home Owner's Insurance Rates
Many people forget that insurance rates are dependent in part upon your credit score. You will probably have higher home owner's insurance premiums with a lower credit score.
It will benefit you to keep your credit score as high as you can when it comes time to buy home owner's insurance.
#5 Many FHA Lenders Have Higher Credit Score Minimums Than Required
While FHA loans are a boon for consumers with average to poor credit, remember that FHA-approved lenders are allowed to set higher credit score minimums than the FHA rules state.
For example, FHA states that the minimum score for getting a home loan is 500. In reality, few FHA-approved lenders will give you a loan with that low of a credit score.
The higher your credit score, the more likely that you will get a loan with a low interest rate. Once your score hits 620, you will have a much higher chance of being approved for a low interest FHA loan.
#6 Good Credit Important When You Have High Amount of Debt
A very important consideration for getting a home loan today is your level of debt. If your debt to income ratio is above a certain level, many lenders will not approve you for a loan.
That said, you have a greater chance of being approved for a low rate home loan if you have a high credit score. Even with a high debt load, some lenders are more likely to approve you because you have shown that you are a good risk.
You are no longer out of options to get a home loan if you have a low credit score. Your chances of getting one will be higher if you have a high credit score, however.
For the best chances of getting a low interest loan, you should get your credit score as high as you can before you apply for the loan.
So, you should make all of your payments on time, and have as little debt as you can to increase your chances for the lowest possible rate on your home loan.
- Sources: WSJ on Higher Credit Scores Helping