When you’re trying to get a mortgage loan, the most influential factor will be your credit score. Generally, the higher your score, the greater your chances will be of getting financing at better interest rates. So, what exactly is a credit score, and how will your credit score affect your purchasing power in Chicago? Keep reading to find out!
What Is a Credit Score?
The Fair Isaac Corporation (FICO) credit score is the most commonly used measure by lenders to determine your credit-worthiness. So, in understanding how this credit score affects your purchasing power in Chicago, you first need to know what it is.
While the exact model varies from lender to lender, some variant of the standard FICO score is usually employed. It draws credit variables from the three major credit bureaus – TransUnion, Experian, and Equifax – to arrive at your score. These variables, ranging from 300-850, and their percentage weights are as follows:
- Your payment history, 35%
- The amount you owe, 30%
- The length of your credit history, 15%
- Kinds of credit you have/had, 10%
- Your new credit, 10%
What Credit Score Do You Need?
So how, exactly, will your credit score affect your purchasing power in Chicago? Well, that depends on your score. Unfortunately, there is no exact, hard-and-fast answer. There are other influencing factors that go into the determination of whether you’ll qualify for the mortgage, things such as income and debt levels.
Roughly, though, there are minimum scores you will need for certain kinds of loans:
- FHA mortgage – 580
- Conventional mortgage – 620
- VA mortgage (through Quicken Loans) – 620
A FICO score of around 750 is considered an excellent score. So if you’re in that range, you should be good to go.
Better Score = Better Odds
With all that said, how will your credit score affect your purchasing power in Chicago? It affects your Chicago purchasing power in that it determines, in large part, whether you are likely to get the loan you need to make the purchase and the interest rates on that loan. In the lender’s eyes, a higher score means a borrower and a loan with less risk. Ultimately, though, your lender will make the final determination.
Even if you have a relatively low credit score, you can still qualify for a loan if you have a fairly high income and low debt levels. Still, though, the difference of a few credit-score points could mean a significant difference in the amount of your monthly payments, owing chiefly to the difference in interest rates.
The converse is that if you have a fairly high credit score, but high debt and low income, your purchasing power may not be as great as you’d think. And if you secured the loan, you might be saddled with higher interest rates and, as a result, larger monthly payments.
Some Solutions
If you do find out that your credit score is pretty low, say, below 620, there are some effective ways to get it up. First, check your report for errors – it happens more often than you’d think – and if you find any, dispute them with the credit bureaus. Second, do everything you can to get current on all payments. And if you’re a renter, have rent payments added to your credit report. Doing these things will get your credit score up and increase your purchasing power.
Will your credit score affect your purchasing power in Chicago? Finding out is the first step you should take toward buying a house. But even if your credit score isn’t as high as you (and your bank) would prefer it to be, you still have options. Maybe you could find a great house that is more affordable and would require less financing.