Mortgage lenders want you to accept their money to buy a home. It's what they're in business to do. They may not turn you away because of a few isolated blemishes on your credit report, but you can be sure that they'll take note of the blemishes. Depending on the extent of the derogatory marks, you'll probably still qualify for a mortgage — but you'll pay more for it than someone with perfect credit.
Generally, your credit score must be at least 740 to qualify for a good conventional mortgage with a reasonable interest rate. Depending on how many dings you have on your credit report, your score will probably drop below 740, and possibly down into the low 600s. If you're financing a home with your significant other, and if one of you has a great score and the other doesn't, mortgage lenders will look to the lower score. Yours may be 740, but if your partner's is 620, lenders will base approval on 620. At 620 or lower, you're probably limited to a subprime mortgage, designed for individuals who may be credit risks.
Effects on Interest Rates
Subprime mortgages involve higher interest rates. The rate increases as your credit score drops. The difference between a conventional mortgage approved at a credit score of 740 and a subprime mortgage approved at a credit score of 620 can be more than 1.5 percent. This can bump up your monthly mortgage payments by a few hundred dollars, depending on the size of your mortgage.
Instead of paying a higher interest rate over the life of your mortgage, you can pay additional points when you close on your loan instead. Points are interest paid in advance. The more you pay, the lower your interest rate will be. Therefore, you can balance some of the effects of the derogatory marks on your credit report by paying more points, if you have enough cash on hand to manage it. A point is equal to 1 percent of the amount you're borrowing. Mortgages often include some points. The better your credit score is, the fewer points the lender will require to get the rate you want.
Your Down Payment
You can minimize the effects of a poor credit history by making a larger down payment on your home, but this also requires having sufficient cash on hand. This is especially true if the black marks on your credit relate to consumer loans like credit cards or medical bills, and not a previous mortgage that you couldn't keep up with — or worse, that the lender foreclosed on.
FHA loans are another option if your credit is iffy. With an FHA loan, the Federal Housing Administration guarantees your loan with the lender, so lenders are more willing to take a risk on you. But some limitations apply. Your new mortgage payments, plus all your payments for consumer debt such as credit cards and auto financing, can't exceed 41 percent of your income. There are geographical limits as well. The price of the home you're buying must be comparable to others in your area.
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