What is a good credit score? If you didn’t know already, when it comes to credit everyone has a number. This number is known as a credit score. So, you need to make sure your score is as high as possible. Generally, credit bureau scores range from 300 – 850. Thus, the elusive 850 is considered a “perfect” credit score. I will tell you that I have never seen an 850 credit score. Although, I have seen plenty of 800 – 840 credit scores. Based on a 2017 FICO study mentioned in a Motley Fool article, 20.7% of all people have an 800 or higher credit score.
Mortgage lenders often consider a good credit score to be 740 or more. The reason is that the best interest rates are usually reserved for this credit score range. Although, once the credit scores inch higher, there are additional perks. Fortunately, buyers do not need an 850 credit score for the best terms. So, let’s dig into finding perks for your good credit score!
5 Huge Perks for Buyers with a Good Credit Score
Yes, a good credit score comes with perks. No doubt about it! Here are the top 5 benefits for buyers in the top credit score range. A key point to remember is that interest rate is not the only factor influencing a mortgage payment.
- Cheaper mortgage insurance
- Lower interest rate
- Better homeowners insurance rates
- Easier underwriting approvals
- More loan options
A Good Credit Score Means Cheaper Mortgage Insurance
When buying a home with a low down payment, mortgage insurance options come into play. Commonly called private mortgage insurance or PMI, it allows buyers to purchase with a low down payment. There are even options for no down payment including VA home loans, USDA loans, or down payment assistance. Mortgage insurance comes in several forms including monthly, single premium, split premium, or lender paid mortgage insurance. Depending on a buyer’s scenario, each has its own advantages.
Single Premium PMI
Single premium mortgage insurance has little or no affect on the monthly mortgage payment. It gives the buyer an opportunity to pay the mortgage insurance up-front, all at once. Options include the buyer paying it out of pocket or financing it. Additionally, the seller, lender, or Realtor may provide a credit to pay this fee.
Monthly Mortgage Insurance
Monthly mortgage insurance is the most popular form. This is included in a buyer’s monthly mortgage payment. Since it is monthly, there is no up-front cost to the buyer. Obviously, this does affect the monthly payment. Therefore higher credit scores will help lower the mortgage insurance and mortgage payment.
Split Premium Mortgage Insurance
Split premium mortgage insurance is a combination of both single premium and monthly PMI. So, it is a hybrid of these two options. Usually, split premium offers a lower up-front fee and a lower monthly fee. Sometimes, this option makes more sense. The most popular forms of split premium mortgage insurance would be FHA and USDA loans. Each charge a monthly and financed up-front form or mortgage insurance premium.
Lender Paid PMI
Finally, lender paid PMI is a loan program offered by some lenders. Basically, the mortgage insurance is included in the interest rate. So, borrowers pay a little higher interest rate yet do not have a separate mortgage insurance premium. Buyers with higher credit scores may take advantage of this product and it may reduce the monthly payment.
As with all mortgage loan products, an experienced mortgage loan officer should discuss these mortgage insurance options with a buyer. The result is to determine which best fits a buyer’s goal and scenario.
A Good Credit Score Lowers Interest Rates
As mentioned above, the higher credit scores mean lower interest rates. Keep in mind that not only is a lower rate important, but also the points paid to get that rate. For instance, two buyers with different credit scores could get the same interest rate. Although, the lower credit score may have to pay “points” to get that rate. Mortgage points or “paying points” mean a percentage of the loan amount. Thus, 1 point means 1% of the loan amount. 1 point on a $250,000 loan is $2,500. Therefore, a good credit score could help avoid extra points compared to a lower credit score buyer.
A Good Credit Score Lowers Homeowners Insurance Premiums
That’s right! Credit scores affect a lot more than interest rates. Homeowners insurance is a part of a housing expense. While insuring what may be the largest asset, making it affordable is key. Insurance companies do factor in the credit score for rating the insurance premium. Not only do elite credit scores lower the premiums, they also provide better options. A low credit score may require an alternative provider which could lessen the available coverage.
Here’s another random but not so random fact. Employers pull credit now and for many jobs, a good credit score is required. This is especially important in the financial or high security employment sector.
A Good Credit Score Provides Home Loan Options
Typically, home buyers want options. Rather than receiving just one loan program, buyers should have something to compare. Even though a loan officer may know there is just one perfect option for a buyer, it helps a buyer to see multiple options. What if a buyer is looking for “the lowest down payment possible”? A non-Veteran buyer may look at a USDA loan which is a no money down home loan. It is an awesome loan and would probably be the best terms for this buyer.
Buying in a USDA Ineligible Area
But, what if the buyer is interested in a very populated area? Additional loan options such as an FHA loan, down payment assistance, or 3% down payment conventional loans should be discussed. Reasons are the buyer may find the perfect house in a USDA ineligible area. Buyers with a strong credit score could have all of these potential loan tools ready to pounce on the right house. Conversely, a buyer with a 640 credit score may be limited only to USDA or FHA. Don’t get me wrong, these are amazing home loans! But, a buyer with a little down payment funds and a good credit score may benefit more from a conventional HomeReady or Home Possible loan.