If you are considering stepping into the housing market to purchase a home, chances are, you are doing some research on mortgage rates and what it takes to obtain a home loan. Figuring out what the mortgage rates are right now and figuring out how you can get the lowest rate possible is an important part of the home purchasing process. There are several things that determine what your mortgage rate is and your credit score is one of the primary things that lenders will look for before they loan you money.
What is a FICO credit score?
This is a credit score that is determined by FICO, a company specializing in predictive analytics, which is used to analyze and predict future happenings. For credit scores, the company uses a variety of credit information to develop scores that will help lenders predict consumer behavior, including how likely it is for the person to pay bills on time and if they are able to handle a large mortgage or credit line. Your credit score is based on several factors including your payment history for all accounts, the amount of debt you currently have, how long you’ve been using credit, and what types of credit you use.
There are several minimum requirements to receive a credit score, including at least one credit account opened for at least six months. If you have a poor credit score, there are several things you can do to help improve it. First, bring active past due accounts current and keep on top of paying things on time. Keep credit card balances as low as possible and limit your applications for new revolving debt such as credit cards. (1)
Can you get a mortgage with a low credit score?
You can generally obtain a mortgage if your credit score is poor, but keep in mind that you may not get the lowest rate available. However, if your score is below 580, it may be difficult to get a loan approved. The higher credit score you have, the more likely you are to get a lower mortgage rate. Raising your credit score even by 20 points or so can really help in getting a better rate. For some people it’s best to wait to buy a home and improve your score and work on financial planning before you apply for a home loan.
A home purchase is one of the biggest investments you’ll ever make in your lifetime. Maintaining good credit, paying your bills on time and managing your overall finances with responsibility are all important things to have figured out before you take on a large home loan.
When you’re ready to take the leap to home ownership, I have more than two decades of experience as a Realtor® and can help you start the process of looking for a new home and can provide tips on the whole process. I love working with people around Clark County and am glad to help you with the information you need to start your adventure.
- American Reporting Company. FICO Source Overview. Accessed via Lynn Posselt, Penrith Home Loans, NMLS#41393.
If you have lived in your home for a while and you’re considering completing a refinance, you likely have some questions as to when or if it’s the right time to do so. Refinancing is a big decision, as it requires a lot of details and time, but it can have some great benefits to it once it’s all said and done. When deciding whether or not you want to refinance, one of the key questions is to ask yourself how long you plan on being in the home. If you intend on staying in the home for several years, a refinance could be a great choice, as you’ll likely recoup the closing costs over your time spent there. For those that are looking to move in a couple of years, refinancing might not make as much sense.
Aaron Hicks, Mortgage Consultant at HomeStreet Bank in Vancouver provides some great reasons to take into consideration on when a refinance might make sense for you.
Reason#1: Reduction in interest rate
Refinancing to lower your interest rate and payment is one of the main reasons why people choose to refinance. Hicks says, “There are still many people out there that have a much higher interest rate on their home loan than they should considering the current market. Refinancing could very well favor a lower interest rate or reduced monthly payment that reduces a person’s overall outgoing monthly debt.”
Reason #2: Reduction in loan term
If you want to pay off your loan faster, refinancing to significantly lower your loan term could be a fantastic idea. In most situations for example, if a borrower wants to refinance from a 30-year fixed mortgage to a 15-year fixed, the borrower will save a substantial amount of money in interest every year.
Reason #3: Cashout.
If you have been in your home for a while and it has gained significant equity, many homeowners choose to refinance and take cash out of the equity. Hicks says, “Some people do this to consolidate liabilities, make home improvements, or use the cash to invest in additional real estate. The ultimate goal here is to have the cash you are taking out work toward future financial freedom.”
Reason #4: Change loan programs.
If you have an adjustable rate mortgage (ARM), it can be very helpful to refinance to a fixed rate loan. Hicks shares, “ARMs carry the risk of having their interest rate increase significantly. When this happens, this can cause severe financial burden on a person’s finances.”
There are many reasons to consider a refinance, but each homeowner’s situation is different. What may work for one, may not work for another. Sit down and look closely at your home loan and what is left to be paid back and consider whether a refinance is right for you.