Your credit score is very important any time you are applying for any kind of loan or line of credit. Financial institutions view your credit score as a representation of how you handle money and repay debt. Thus, if you have a lower credit score you may have a more difficult time applying for loan. When we speak of credit scores many wonder, ‘what exactly is considered a low score?’ Generally, 680 is considered a threshold that starts indicating ‘low credit.’ While 680 is considered average, the lower you drop below 680, the more difficult it will be to get a loan.
One of the first ways in which having a lower credit score impacts the home loan process is that it may make it difficult or impossible to get a loan if you have a low credit score. Borrowers with credit scores lower than 600 may have a difficult time getting approved for a mortgage. The next difference you will notice is that you may not qualify for the best mortgage rates available.
Generally, if you have a score above 700 you should be able to qualify for lower rates but if you are in the 600s you may end up with a higher mortgage rate. NerdWallet takes a look at how a 100 point difference can impact your home loan, “Suppose a borrower looking to buy a home worth $300,000 has a 20% down payment and applies for a 30-year, fixed-rate loan of $240,000. She has a 780 FICO credit score, which gets her a 3.875% rate. That’s around $1,129 a month, not including taxes, insurance or homeowners association fees.
If this borrower’s score dropped by about 100 points to between 680-699, her rate would increase to about 4.125%. At that interest rate, her monthly payment would increase to about $1,163, an extra $34 a month, or $408 per year. The effect of the difference in the rates may not seem significant at first, but added up over years, it could be a lot. In this example, a 100-point-drop has the borrower paying an additional $12,240 over 30 years.” If you are concerned that you may not have an ideal credit score it may be best to raise your score before applying. However, if you have a good credit score, small point differences won’t really impact your mortgage rate. As soon as you are ready to buy a home, speak to a mortgage lender to learn more about what type of loan and rate you can expect to qualify for.