How Your Credit Score Affects Home Loan
If you’re looking to purchase a house anytime in the near future, it’s essential to keep tabs on your credit score. While this number goes largely ignored until it’s time to purchase a house or car, it is ever-changing in the background while you go about your life.
Your purchase history, credit history, and payment history all factor into what makes up your credit score. If you’re not careful, a low credit score can drastically impact the type of home loan you can access.
Keep reading to find out how your credit score affects home loan offerings.
Home Loan Interest Rates
All loans are based on risk. Simple as that. The number one question any lender will ask themselves is how likely you are to pay them back. How do they answer that question? By looking at your credit score.
Your credit score is compiled by three major institutions and is based on your entire credit history. How many credit cards you have, how much credit you use every month, how much you do or do not pay on those cards, and how much debt you carry all factor into your score.
Even a small oversight can impact your credit score dramatically, so be sure to keep close tabs on every card you own. Frequently check old cards to makes sure no payments are made from forgotten subscriptions that were set up to auto-charge.
Every card is linked to your credit report, so a forgotten $1.99 charge two months overdue on a long-lost card you stopped using will still impact your score.
When it comes right down to it, the better your credit score, the better your loan interest rate. Loan institutions assume the better your credit score, the more likely you are to pay back the loan in full.
Better ratings get rewarded with better interest rates. The lower your score, the worse off your interest rate.
What does this look like practically? Here’s an example based on credit scores and interest rates for a $200,000 30-year fixed-rate loan.
Average Interest Rate
Total Interest Paid
Very Bad: 620-639
As you can see, interest adds up in a hurry! The faster you pay off your loan, the less interest you’ll pay over its lifetime.
However, equally important is acquiring the lowest interest rate possible. These numbers are just examples, but the better your score, the more likely you are to get the best interest rates available in the current market.
Looking at our example rates, if your score changes in the slightest, you could be paying thousands more than necessary over the life of your loan.
That’s a lot of money you could put into savings, a college fund, or a vacation fund if you’re feeling particularly generous. The point is, the better your score, the less you’ll pay monthly and the less you’ll pay over the life of your loan.
Amount You Pay And Borrow
In addition to the interest rate for your loan, your credit score also impacts how much you’ll be required to pay upfront and the amount you’ll be allowed to borrow. Remember, loans are all about risk assessment.
Your lender believes you’ll pay back every penny owed, they’re more likely to offer you the loan amount you desire.
Should they have some doubts as to your reliability, however, they’ll be far more hesitant to provide you with a hefty loan and may even set a cap for how much you can borrow.
Here Are Some Practical Examples To Keep In Mind
Say you have an excellent credit score (760-850) and you want to purchase a house that is valued at $250,000, you might only be required to put 5% down. That means you’ll pay $12,500 upfront and need to acquire a loan for the remaining 237,500. Due to the excellent score, you’ll likely be allowed a loan on those terms.
If, however, your credit rating is only average (680-699), you might be required to pay 20% upfront. That means you’ll need to pay $50,000 upfront for the property of your dreams and still acquire another $200,000 in credit.
When it comes to acquiring a home loan, it’s essential to know where your credit score stands. If your credit score is “average” or even “good,” you might want to wait a year or two before you think about applying for a home loan.
The better your score, the less you’ll be required to pay upfront and the more you’ll be allowed to borrow. Your credit score could mean the difference between purchasing the house of your dreams or settling for a less desired property.
If your credit score needs repair and you can wait, it’s always better to boost your score before house hunting. You’ll maximize your potential for loan and housing options with a better score.
Where Is Your Credit Score?
As you can see, the better your credit score, the best possible outcome for loan acquisition, low-interest rates, and long-term savings. If your credit score is less than perfect, it’s wise to wait and do as much as you can to repair your score.
Unfortunately, credit scores build over a long period, and fixing them doesn’t come quickly. Staying consistent with paying your bills on time and eventually paying off what is owed is crucial for improved scores. Waiting a year or two is well worth it to save yourself sixteen or twenty-four thousand dollars over the life of your loan.
Now that you know how much your credit score impacts your home loan, are you ready to apply for a mortgage, or will you decide to wait until your score improves?