Owning a home is a long-standing dream for many Americans, and most prospective homebuyers are compelled to financing in order to buy. However, did you know that your credit score can determine your interest rate and payment terms with a mortgage lender? So the question now is, just how much of your credit score weighs in on your mortgage payment?
What Is A Credit Score?
A credit score is a number used by lenders to regulate how likely you are to pay back the loan. They are calculated by using the information contained within your credit reports. Scores can range from 300-850. Generally most lenders look at higher credit scores more favorably than lower scores as the key indicator to the likelihood of being paid back. So if you are looking to apply for a mortgage it would be in your best interest to increase your credit score before applying.
How Is Your Credit Score Calculated?
Your credit score is based off of whether or not you pay your bills on time (i.e. payment history), the total amount of dues owed (typically, a percentage of your outstanding credit), the length of your credit history, as well as the type of credit and how much is new.
How Does Your Credit Score Determine Your Mortgage Payment?
To put it more simply, the higher the score the lower your mortgage interest rate will be. So for example, if we take a borrower who has a credit score ranging from 760-850, this person qualifies for around 3.55% mortgage interest rate on a 30 year fixed rate mortgage, whereas a borrower with a low credit score would receive a higher interest rate. Needless to say, this was just an example for illustrative purposes only; the best way to find out your mortgage interest rate is to speak a mortgage lending professional.
How Can You Improve Your Score?
To get your credit score where you want it, it is crucial that you pay all your bills on time. Keep in mind that your payment history is the largest factor of your credit score; therefore, any late or missed payments will hurt your overall credit score.
Also, amounts owed on existing credit lines may factor into your score. So it is important that you pay off and lower your credit card balances. Note that a ‘’maxed out’’ credit card may reflect poorly on your score as well. So try to pay off any debts and not opening new credit cards to help improve your score.
The Point is…
Buying a home is possible, but it is a lot of responsibility that needs to be taken seriously. If you continue to take care of your credit cards your credit score will likely by high, and your mortgage terms are far more likely to be in your favor.