Your credit is critically important for many things, including your mortgage
We’ve talked before about how you can build your credit rating, but sometimes it’s important to also discuss how your credit score materially affects your ability to qualify for a mortgage. This might seem like a given – of course your credit score, which determines how responsible you are with loans, affects how difficult it is to get a mortgage – but the specific ways that it changes how one individual can qualify for financing compared to another who can’t are much more subtle and specific. In short, your credit score affects what mortgage products you can obtain, which will usually differ from one another in either the interest rate, the loan-to-value requirements, the fine-print, or all three.
Your Interest Rate
The first – and to many, most important – way that your credit score affects what kind of mortgage you can qualify for is the interest rate. Since your credit score represents how confident lenders are that you will pay back any loans given (in the form of credit), the higher your credit score, the lower the risk to the lender. The lower the risk to the lender, the easier it is for them to justify giving you a lower interest rate. If you have a lower credit score, however, the lender will see it as a riskier loan. Because of this they will most likely only offer you a loan with a higher interest rate to offset the risk to them – although working with a broker can make this aspect of your mortgage easier.
Certain mortgage products aimed at borrowers with a very high loan-to-value – for example, if you are buying a home with only 10% down – will only be available to borrowers with reasonably high credit scores. This is because the higher the loan-to-value of a home, the riskier it is to the lender. Mortgage insurance does offset some of this risk, but lenders tend to not want borrowers to default, no matter how protected they are by insurance.
Some mortgage products have very favorable fine-print for the borrower, such as very light prepayment penalties or portability. Generally the most attractive mortgage products will only be made available to borrowers with higher credit scores, due to the lower risk to the lender.
Your credit score is incredibly important when it comes to qualifying for a mortgage, but if you have less-than-perfect credit, don’t lose hope! Raising your credit score is surprisingly simple. And if you can’t wait for your score to improve, working with a mortgage broker can give you access to mortgage products that normally wouldn’t be available! Reach out to us and get pre-approved; it takes only a few minutes!