This guide covers how your credit impacts your homebuying process. If you are in the market to buy or refinance a home, you know the importance of your credit score. Gustan Cho Associates are experts in all areas of mortgage lending and cannot stress enough the importance of a credit score. Dale Elenteny says the following about how your credit impacts your homebuying process:
In this blog, we will discuss how your credit score will affect your mortgage qualifications and, most importantly, how much down payment is required for you to buy a home.
Most buyers want to make the smallest down payment possible with mortgage rates as low as they are today. The following paragraphs will cover how your credit impacts your homebuying process.
How Your Credit Impacts Your Homebuying Process: Factors Determining The Qualification Of Borrowers
There are three main areas of concern when getting preapproved for a mortgage.
- Credit score
Debt-to-income - Down payment (and reserves).
How Your Credit Impacts Your Homebuying Process: How Mortgage Underwriters Analyze Debt-to-Income Ratios
Your debt-to-income ratio will dictate how much home you can afford. An underwriter must assess your ability to repay your mortgage loan. Your total qualified income must be approximately double your expenses, including your future housing payment (with taxes, insurance, and any homeowners
association dues). Many lenders have overlays regarding the debt-to-income ratio, which will limit the number of homes you can afford. The good news is that Gustan Cho Associates has no lender overlays on their mortgage programs.
How Your Credit Impacts Your Homebuying Process: Debt-to-Income Requirements Depend on The Loan Programs
Each mortgage loan program has its own debt-to-income ratio requirements. In many cases, we can go up to 56.9% back in the debt-to-income ratio for FHA mortgage lending. We can go even higher on some VA lending products. Conventional mortgage lending will have a strict cap of a 49.99% debt-to-income ratio.
USDA loans have a 31% front-end and 43% back-end debt-to-income ratio. If you are trying to calculate your debt-to-income ratio independently, we strongly encourage you to contact our team.
The amount of income that can be used to qualify for a mortgage will vary dramatically based on your sources of income. The income you receive, and the amount allowed per mortgage guidelines, can vary dramatically. Please leave it up to the experts, so you know the correct price range for the homes you should be shopping for.
How Your Credit Impacts Your Homebuying Process and Down Payment
The next main pillar when qualifying for a mortgage is your credit score. But just because you may have a qualifying credit score does not mean you qualify for a mortgage loan.
Your credit score will be the main factor determining the interest rate you qualify for, but other factors, such as payment history and account seasoning, will also play a role.
For example, you could have a 660 credit score (which will qualify you for virtually every mortgage program) but have a collection account that is only nine months old. This may hinder your mortgage qualifications because most loan programs do not allow recent collection accounts. Having the highest credit score possible will save you thousands of dollars on your mortgage loan.
How Your Credit Impacts Your Homebuying Process and Mortgage Rates
The interest you pay is determined based on your credit score and your credit score only. This eliminates the possibility of discrimination. Mortgage rates are based on credit score thresholds. The amount of interest will be broken down into 20-point buckets. Below is an example AND not factual, REACH OUT TO A LICENSED LOAN OFFICER FOR AN EXACT QUOTE.
- 620-639 – 7.75%
- 640-659 – 7.50%
- 660-679 – 7.25%
- 680 -699 – 7.0%
- 700 – 719 – 6.75%
- 720-739 – 6.50%
- 740-759 – 6.25%
- 760 and above – 6.0%
In the (hypothetical) example above, your rate could be 1.75% lower based on a higher credit score. Based on a loan amount of $300,000, the savings will add up quickly:
How Your Credit Impacts Your Homebuying Process and Interest Expense Over The Term of The Loan
The total interest paid on a 30-year fixed mortgage at 5.25% is $296,380, and the total interest paid on a 30-year fixed mortgage at 4% is $215,608. A higher credit score in this example could save you $80,772! We hope you now see your credit score’s impact on your mortgage loan. Borrowers with higher credit scores will get lower interest rates. Lower interest means tens of thousands of dollars in savings over the loan’s term.
How Your Credit Impacts Your Homebuying Process on Loan Level Pricing Adjustments
LLPA stands for loan level pricing adjustment. This is a term used by Fannie Mae and Freddie Mac. These are adjustments to your interest rate based on certain eligibility factors such as credit score, loan purpose, occupancy, number of units, product type, and more. These loan-level pricing adjustments are cumulative, and each adjustment will affect the interest rate you qualify for. These interest rate pricing adjustments are universal for every mortgage lender participating in conventional mortgage lending. As you can see from the chart below, the credit score is a major driving factor in the amount of the loan level pricing adjustments added to your rate.
The third aspect of qualifying for a mortgage is down payment and/or available assets. The larger down payment you have available will increase your chances of qualifying for a mortgage.
Your credit score will also dictate what mortgage products are available to you. For example, very few mortgage programs are available if your credit score is below 580.
Credit scores below 620 will require VA or FHA mortgage lending. For our veterans, no down payment is required regardless of credit score. Depending on the underwriting qualifications, they may ask you to have reserves available.
How Your Credit Impacts Your Homebuying Process: FHA Loans Under 580 Credit Scores Versus Over 580 FICO
FHA loans requires a 10% down payment if your credit score is below 580. If your credit score is 580 or above, only a 3.5% down payment is required. Conventional mortgage lending requires a minimum of a 620 credit score and a minimum of 3% down.
Putting down 3% is only available to first-time homebuyers. A first-time homebuyer has not owned a property in the previous three years (36 months before the application date).
If you have owned a property in the past three years, your minimum down payment for a primary residence is 5% with conventional mortgage lending. The automated underwriting system for conventional mortgage lending can be tricky. With a credit score below 640, you may not get an automated conventional approval. Therefore, a credit score is important.
How Your Credit Impacts Your Homebuying Process: Importance of Maximizing Credit Scores Before Applying For a Mortgage
Gustan Cho Associates cannot stress enough the importance of your credit score. Since we are experts in lower credit score mortgage lending, we have seen virtually every credit profile.
We help clients with credit scores in the 800s and down to the 500s. It is very easy to damage your credit score. As you may know, repairing your credit score can be difficult and time-consuming.
If your credit profile is imperfect, we would like to encourage you to contact our mortgage experts. While we don’t recommend a credit repair agency, we may be able to point you in the right direction to raise your credit score in a reasonable timeframe. We have helped numerous clients raise their credit scores to qualify for the mortgage program that suits them best.
Starting The Mortgage Process With a Mortgage Company Licensed In Multiple States With No Overlays
Gustan Cho Associates are made up of mortgage professionals who take pride in their work. Our team is committed to offering fast and reliable service. You must have a trustworthy mortgage team in today’s competitive housing market. Our seasoned loan officers are available seven days a week to help you with your qualifications. Any mortgage-related questions can be directed to Mike Gracz at (800) 900-8569 or email mike@gustancho.com. We would love the opportunity to help you and your family realize the dream of homeownership and make it a reality.
