You’ll need a credit score of at least 600 to get a mortgage for your home. However, keep in mind that the higher your credit score is, the more likely you are to qualify for the mortgage and interest rates that you want. Lenders estimate your ability to pay back money borrowed based upon your credit score. A high credit score can result in a lower interest rate and save you thousands of dollars in interest paid over the life of the loan.
The Five Factors of Your Credit Score
Payment History – 35%
Outstanding Credit Card Balances – 30%
Length of Credit History – 15%
Type of Credit – 10%
Inquiries – 10%
The best score to have is 720 or above – you are viewed as a safe risk and typically will receive a loan with a lower interest rate. If your score is below 720, you may want to try to raise it. Making payments on time, lowering your credit card balances, keeping older accounts open, and using discretion when applying for new credit will all help to increase your score. (Source: http://www.myfico.com/crediteducation/whatsinyourscore.aspx )
Put down as much as you can afford without overextending yourself financially. Homeownership comes with many unexpected costs, from property taxes to homeowners insurance to emergency repairs. Plus, once you own a home, you’ll want to redecorate. All of these costs can add up to hundreds (or thousands) of dollars more than you planned.
For those looking for a low down payment, 3% and 5% down payment options are available for many conventional loans. FHA loans can be a great way to purchase a home with a low down payment, as the minimum down payment requirement is only 3.5% of your mortgage amount. VA loans, which are available for eligible military veterans, have a zero down-payment option for certain loans. USDA loans, which are available for housing in rural areas, have a zero down-payment option as well.
If you can contribute a larger amount to your down payment, you’ll have lower PMI (Private Mortgage Insurance) payments. You’ll need to make these payments until you’ve paid off 20% of your mortgage amount. You can avoid having to make PMI payments by putting 20% down when you purchase your home. This option works for some homeowners, but many choose to make a lower down payment and have PMI payments.