How Your Down Payment and Your Credit Score Impact a Mortgage
How the Size of Your Down Payment and Your Credit Score Impact Qualifying for a Mortgage
When you’re applying for a home loan, what’s more important: a large down payment or a high credit score? The simple answer is, both are equally important. A 20% down payment will mean you do not have to pay Private Mortgage Insurance (PMI) and you can borrow less to purchase your home. An excellent credit score signals that you have responsibly managed your debt and have a low debt-to-income ratio. Before you apply for a mortgage, you should save as much as you can for your down payment and closing costs and work to improve your credit score.
The mortgage application process includes an in-depth review of your financial information to find out if you are a good candidate for your mortgage loan. This will include a review of factors like your assets and savings and your credit score. The four main factors reviewed, sometimes called the four Cs, are:
- Credit History and Score – a good credit score reflects a healthy mix of credit and on-time payments. Your lender wants to know how you’ve managed your other loans and lines of credit to predict how you will manage your mortgage.
- Collateral – or the value of the home you are purchasing. In the event of foreclosure, your lender will take possession of the home to repay the debt.
- Cash – or the value of your down payment. A 20% down payment is not a requirement to buy a home but will eliminate the cost of PMI. Some conventional loans are available with down payments as low as 3%.
- Capacity – or your debt-to-income ratio. If you have a high debt-to-income ratio, you may not qualify for a mortgage loan because you are stretched too thin. Before you apply, try paying down high interest debt or consider debt consolidation options.
When you put down less than 20% on a conventional loan you will have to pay PMI until your loan is amortized at a certain level. These PMI payments go toward your insurance policy and do not lower the balance of your mortgage. The more equity you invest in your home, the less risk you present to your mortgage lender. If you’re financing with a smaller down payment, but have an excellent credit score, you will still have to pay PMI, but your rate may reflect your high credit score.
Every borrower is different and that’s why it’s imperative to talk to a mortgage lender as early as possible. A qualified loan officer can help you determine how much you should put toward your down payment, what type of loan is best for you, and how much home you can afford. If you have any questions about your credit score or how much to save for a down payment, let us know.