Sure, anyone can apply for a home loan despite one’s credit report and score or the individual’s monthly income. But what’s important is the kind of loan and the terms that the lender will give you. All this are influenced, if not entirely dependent on your credit score. There is no definite required minimum credit score for home loan since it varies from lender to lender but the average minimum is 660. A score lower than that will not exactly reject you of a loan but your terms and rates will be less favorable than those offered if you have a credit score of 660 and above. According to the Fair Isaac Corporation, to get the most favorable loan and rates, you have to have a score of at least 760.
What’s the difference?
To be exact, there is at least a 4% discrepancy between the interest rates given to individuals with a credit score of 760 and 580. If you do the math, that can come out to be a lump sum of money. That’s why it matters to have a good credit score when applying for a loan. A score between 660 and 759 can still garner you a loan with a fairly decent rate.
3 Home loan types
There are 3 types of loans; fixed-interest mortgage, adjustable-rate mortgage and interest-only loan. The fixed-interest mortgage is where the interest rate is the same all throughout the duration of the loan. A monthly amortization fee is also fixed. The most common duration of this type of loan is a 30-year period where the rates are at its lowest.
The opposite of the fixed-interest mortgage is the adjustable-rate mortgage where the interest rates change every year. Usually, the interest rate is fixed during the first few years and after a that time period, the total outstanding amount is amortized through the remainder of the loan.
Interest-only loans are loans where you can pay only the interest rates during the first few years. The borrower is not obliged to pay part of the principal amount in fear of getting an increase in the interest rates but paying an advance may decrease it. This type of loans works very similarly to the adjustable-rate mortgage.
Aside from credit score
While the credit score can affect the loan and rates, there are a few others that the lender takes into consideration to assess the borrower. The proof of monthly income and monthly expenses will prove how reliable your financial situation is and a record of your assets will prove you to be low risk. Sometimes, a lender will also require collateral of these assets or a consignee.
Get the best rates
The best way for you to get the best rates is to improve your credit report and score as much as you can. Request for a free copy and check for discrepancies. False information may drag your score down. If you have any existing loans or credit, pay it down or pay it off. These actions can significantly increase you credit sore.