It is possible that a low credit score will prevent you from buying a home. However, there are other variables that lenders will look at when making a loan decision. Furthermore, there are loan products designed for people with average credit or who have made credit mistakes in the past.
How Do Lenders View Credit Scores?
Your credit score will play a role in determining both whether you are eligible for the loan and what terms to extend. For instance, someone who has a credit score of 800 is more likely to get the lowest advertised interest rate compared to someone who has a score of 640. Those who have good credit may also be entitled to get a loan with a lower down payment. Down payments can range from 0 percent all the way to 20 percent or more based on the loan product that you choose.
What Else is Taken Into Consideration?
Low scores won’t necessarily disqualify you from getting a loan. However, there needs to be something that offsets the low score like a low debt-to-income ratio or a significantly high yearly salary. If you have other assets that could be liquidated to pay for the home, that may provide justification for approving your loan request.
Your credit score needs to be taken in the context of the type of loan that you are asking for. For instance, if you have a credit score of 550 to 640, you may still qualify for an FHA loan or a USDA loan. Government issued loans such as VA home loans will also vary in regards to minimum credit scores, but since the government wants more homeowners, they will do what they can to help. However, it may be almost impossible to qualify for a traditional or jumbo mortgage.
Are Loan Approvals Universal?
If you have been turned down for a loan, don’t assume that another lender wouldn’t approve your application. Each lender has its own criteria when determining who is eligible for a mortgage. For instance, a local credit union may approve your application because it wants to earn your business over the long-term. Therefore, it may have impose lower minimum credit scores for a home loan.
Your credit score alone will not determine whether you are approved for a mortgage or not. To ease your mind, feel free to contact a lender before applying to discuss how your credit score could impact your chances of getting a loan. Lenders may also have tips as to how you can improve your score and increase your chances of obtaining financing.
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