Your credit score is an important factor in qualifying for a good mortgage rate. The higher your score, the lower rate you can qualify for. A score of 740 or above is considered excellent, and can help you secure the best rate. A drop of 100 points could cause a drop of 1 percent. This may seem small, but it can add up to a lot of money over time. The good news is, there are steps you can take to control your credit score and make big improvements over time. When it comes to home buying, planning is everything!
Why is your credit score an important matter when getting a home loan? Lenders look at your credit score as a way to understand your debt-to-income ratio. This is generated by your credit history, paying your bills on time, and paying off any credit card balances. The number of your credit score is an indication to the mortgage lender how responsible you are to paying back money borrowed. The more likely you are to pay back the lender on time, the higher chance of qualifying for a better rate.
Generally, industry professionals consider a score in the 700’s to receive the lowest rates. Mortgage experts will also review your household income, assets and overall financial picture along with your credit to determine your rate. A score below 700 could still bring a fair rate, however even that small 10 to 20 point difference makes a huge impact on your mortgage rate.
For example, someone with a credit score between 680 and 699 would have a mortgage rate approximately 0.399 percentage points higher than a person with a 760-850 score, according to Forbes advisor. It may seem like nothing at first, but considering the lifetime of your mortgage, that could be a difference of $20,000 or more in interest that is paid on the mortgage. Compared to a borrower with a higher credit score, a lower rate, who would save that money on interest over time.
While the interest rate is a significant factor, it is not the only thing in play. When a borrower makes the monthly payment towards the loan, a certain percentage goes towards the principal amount. With a lower interest rate, more will go towards the principal payment while paying less in payments overtime than someone with a higher interest rate.
In short, the higher your credit score and downpayment, the lower your interest rate. Lower interest rates will lower your monthly mortgage payment which will save you up to thousands of dollars over the length of your mortgage.
If you are considering purchasing a home and have a less than ideal credit score, you will want to focus on improving your credit score as much as possible before applying for a home loan. Pay off debt, gather your financial status, and create a budget. Sit down with a mortgage professional to discuss your options, find out how much you can afford and get a plan together for your down payment, closing costs and eligibility. You can also look to assistance or consider an FHA loan which has less rigid requirements than other conventional loans. Depending on the loan type, you have better chances of qualifying if you have more for the down payment, at least 10 percent or more, when you have a lower credit score.
Of course, everyone’s situation is unique. Find out about your options to figure out which will work best with you and your credit score. Come up with a plan and work with your mortgage professional to get you closer to that dream home.
*This article is intended to be accurate, but the information is not guaranteed. Please reach out to us directly if you have any specific real estate or mortgage questions or would like help from a local professional. The article was written by Sparkling Marketing, Inc., with information from resources like Forbes, Investopedia, and Hud.gov.