11 Dec How Credit Scores Impact Your Chance To Secure A Mortgage
Paying the full amount of a monthly credit card bill has serious benefits for potential mortgage borrowers. Your credit score is one of the top factors lending agencies study when determining what size loan they will provide when it comes time to buy property. Improving that score every month can make securing financing easier.
Before you start the mortgage application process, take time to understand what role a credit score takes. Because credit card charges and property purchases seem like two separate types of expenses, many do not realize how much of a factor your credit score plays in the homebuying process. But when it’s time to secure a mortgage payment, having a high credit score can make all the difference.
While it is far from the only factor that makes up mortgage rates, credit scores can play a huge factor in the monthly rate a lender will offer. Here are three facts to know about the importance of credit credit card payments on securing a mortgage:
1. Many Lenders Will Study Credit Scores From Multiple Sources
Your credit score is a three-digit number that predicts how likely you are to pay back a loan in time. The higher the score, the more confident a bank is in giving you a substantial loan.
There are three major credit reporting agencies – Equifax, Experian, and TransUnion – and all three may interpret different data within your personal credit report about how much money you’ve spent and how quickly your debt was paid back. If a lending agency evaluates these three scores, they are most likely to dismiss the high and low numbers and go with the middle score you’ve been given, the Consumer Financial Protection Bureau stated.
The most common method for calculating a credit score was developed by The Fair Isaac Corporation (FICO). Ranging from 300 to 850, a FICO score is the standard 90 percent of top lending agencies use to help them determine how much of a mortgage loan to give, the company claimed.
Repaying credit card debt on time is a strong way to build up a credit score.
2. Minimum Scores Play A Role, But Don’t Exclude
The Federal Housing Administration looks to assist first-time homebuyers in securing the loan they need to buy property. The FHA doesn’t hand out loans to everyone, though, and that is largely due to credit scores. To secure the FHA’s best monthly mortgage rate, you must have a FICO score of 580 or higher. Other lending agencies have similar requirements for potential customers looking to take out loans.
If your FICO score is less than 580, securing a loan from the FHA or some other agency isn’t impossible; it just requires more up-front payment. The FHA requires loan applicants who don’t reach the credit score minimum to have a down payment of at least 10 percent or more of the property’s value.
Having a high credit score gives you a greater ability to secure the loan you need. It also gives you the freedom to determine a down payment you are comfortable with, instead of requiring a sizable portion of the home’s price from the start.
Having a strong credit score can impact your ability to secure a mortgage.
3. The Higher The Score, The Higher The Savings
Reaching the minimum credit score requirements for a lending agency is useful, but your goal should be to raise your score as high as possible. Over the entire length of your homeownership, having a high credit score and low monthly mortgage rate will save you a lot of money.
A credit score of 620 seems close to a score of 700, and the monthly payment of $1,527 for the 620 score compared to $1,313 for 700 reflects that, U.S. News and World Report wrote. The two interest rates rates are also close: 6.2 percent for 620, 4.8 percent for 700.
But multiply that difference 12 times a year for 30 years, and the credit score just 80 points higher ends up saving a homeowner more than $77,000 in interest rates over the life of the home. Add in the principal costs and the slightly higher credit score will result in serious financial savings long term.
Understanding how credit scores work can be complicated, especially when figuring out the impact they may have on your mortgage rate.