I get this question very often on my twitter.
In order to qualify for the top interest rates, a good credit score is a must!
How important are individual credit points and loan percentages?
Even a single credit point or percentage on a loan can be detrimental.
Consider the average borrower has a loan of around $200K at a 30year fixed rate of 5%.
Did you know this borrower would pay more than $186K in interest alone?
Now take the same borrower scenario above, and apply it to a 3% fixed rate.
This same borrower is now only projected to pay $103K in interest…
That’s a saving of more than 40%!
In addition to incredible savings long-term, a lower rate will significantly lower average monthly payments on the loan.
This is why it’s so important for homebuyers to know and restore their credit scores if necessary, prior to considering purchasing a home. A great credit score will keep more money in the pockets of the buyer.
Range of credit scores
These are typically calculated using a 5–step process:
- Payment History: This single point accounts for a whopping 35% of the consumers credit score. Paying your bills on time will result in higher scores.
- Amount Owed: This like payment history accounts for a large percentage of the consumers score. 30% of the consumers credit score will be determined on how much available credit the consumer has used. Higher amounts used = lower score.
- Credit Length of Time: this accounts for 15% of a consumer’s credit and directly reflects the length of time a consumer has had a credit line. The longer the relationship, the better the score.
- New Lines of Credit: these accounts for 10% of the users score. When multiple accounts are constantly opened up, this will damage a consumer’s credit score.
- Credit Types: 10% of a consumer’s credit score is affected directly by the type of credit accounts they choose to open. Some types that benefit this score are retail store cards, installment loans, and credit cards, etc.
All of these are taken into account when a lender is considering offering a mortgage or home loan to a borrower.
In our current market, consumers likely need credit scores of around 740 or above to obtain the best rates.
A calculated minimum for a conventional home loan is a score of 620. When loaning money out to scores of 600, a consumer can expect to pay more interest and higher rates than those with more beneficial scores.
The government entity Fanni Mae requires minimum scores of 620-660 before offering low-interest loans.
The Federal Housing Authority (FHA), another lender option, requires a minimum score of 580 prior to lending to a consumer.
In summary: a score of 740 is a target score to obtain for best results, lowest rates, and an all around more enjoyable home purchasing process.