We are all familiar with the fabled ‘American Dream.’ You know what we’re talking about – having a good job, maybe a nice little family and that house that you have always dreamed of. We can all relate, as there is nothing better than the feeling of having a home that is all your own. But as much as Americans love their houses, the housing market has still not totally recovered from the housing bubble of recent years.
One reason that the housing market is still in a bit of a slump is because many Americans may find that they are unable to qualify for a mortgage loan. A recent study revealed that around 30 percent of Americans would probably not qualify for a home loan if they were to apply for one right now.
The study we just mentioned allowed analysts to check out data from about 13 million mortgage quotes and 225,000 loan purchase requests. The analysts found that loan applicants with credit scores lower than 620 were not likely to receive quotes for mortgage loans, even if those same people were able to make a large, 20 percent down payment on a new home. FICO reported recently that nearly 30 percent of American consumers have credit scores that are 620 or less.
Financial research teams also discovered that loan applicants needed to have a credit score of 740 or more to qualify for the top shelf (lower) interest rates. The threshold to get the best interest rates was just 720 back in 2010.
People applying for loans with the best credit scores scored an average 30 year fixed rate mortgage interest rate of 4.42 percent. By way of comparison, the loan applicants with scores between 620 and 740 ended up getting loan quotes with interest rates that ranged between 4.47 and 5.09 percent.
When you take into consideration the size and long term of a typical mortgage loan, this difference can add up to thousands, possibly even tens of thousands of extra dollars in favor of borrowers who get a mortgage with higher credit scores. Unfortunately, the folks who can usually least afford extra large payments – those with lower credit scores, in many cases – wind up being the very same people who will have to pay more than their counterparts with higher credit scores.
It is important to keep in mind, though, that the folks with the credit scores between 620 and 740 are still in much better financial shape than the nearly 30 percent of American consumers who probably cannot even qualify for a mortgage loan at all.
So what are people to do if they want to purchase a new home, but have lower credit scores? Saving money for a down payment is a good first step, but not the only thing that one should do. It is also a good idea for these folks to check out their credit reports to find out exactly where they stand. They should look to correct any mistakes on their credit reports and then try their best to pay off higher interest balances to help improve their credit scores in the weeks and months to come. It may take a while, but the more outstanding debts that are paid off, the better a consumer’s credit score becomes.
If your credit score has dipped down a bit in recent months, and you are looking forward to purchasing a home in the near future, please use the information you gleaned from this article as the motivation you need to make sure you don’t get turned down for a mortgage when the time comes to start shopping around for a new place to live.