One thing is for sure when it comes to financing the purchase of a home: your credit score matters. In fact, your credit score is the single biggest indicator of determining whether or not you will qualify for a loan. The minimum score you need will depend on the lender, your down payment, and the kind of loan you are applying for. While it is certainly possible to get a loan with a low credit score, there are compensating factors that can help you. This is what you need to know about your credit score you'll need to buy a home in NJ.
Here are some lenders that will accept a credit score on the low side:
FHA Loan: 580 minimum
USDA Loan: 620 minimum
VA Loan: 580 minimum
Conventional Loan: 620 minimum
203k Loan: 640 minimum
Your credit score will directly impact the interest rate you receive on your home loan. The lower your credit score, the higher you can expect your interest rate to be. Here is a general breakdown:
579 and lower: If you can get approved for a mortgage with a score this low, you should expect an interest rate approximately 2% higher than the current lowest rate.
580-619: You should expect an interest rate around 1% higher than the lowest rate available.
620-679: Your interest rate will only be slightly impacted, with rates around .5% higher.
680-739: Your interest rate will not be impacted.
740 and higher: You will get the best interest rate available.
What else can you do?
If you have bad credit, it doesn’t mean you are completely unqualified for a home loan. You can make up for a credit score that is lacking with a low debt-to-income ratio or a large down payment. Other things that can reduce the lender’s risk in lending to you are 5+ years with the same employer, a high income, a sizable savings account, and residual income. Lenders will also look deeper into your credit report to get a full understanding of your financial situation. They will look to see if you have unpaid debt in collections, late mortgage payments, or recent bankruptcy and foreclosure filings.
If you know you will be applying for a home loan in the near future, you can take some steps now to improve your credit score. Check your credit report for errors and work towards removing mistakes. You can also pay down your credit card debt in order to achieve a more attractive credit utilization ratio. If you can keep your credit card balances below 30% of their limit, this is a good credit utilization ratio. Make an effort to keep up with on time and in full payments and work with lenders on late payments. These steps might just be enough to push you into the next credit score bracket and make a huge difference in your interest rate.
If you are concerned about how your credit score might impact your eligibility for a home loan, there are things you can do to improve your chances. Understanding your credit score and what lenders are looking for is the first step.