If you have a bad history of late payments, high credit card balances, bankruptcy, liens and lots of credit accounts and applications you likely have a low credit score.
You probably know by now and have been told my countless people along the way that when it comes to buying a home, your credit score can dramatically affect, not only, whether you qualify for the loan but what interest rate you will pay.
The reason your credit score will affect whether or not you will get approved for the mortgage and the interest rate is because your credit score provides a rather good indication to the bank or lending institution of how likely you are to pay back the loan on time each and every month.
How Credit Score Affect Mortgage Approvals
If your credit score is below 580, you won’t be able to qualify for maximum financing on a typical new home purchase through the FHA. For a conventional mortgage you will need to have a minimum credit score of 620 to quality.
If your credit score is just over these minimum required amounts might mean that your home will end up costing you thousands and thousands of dollars more when comparing the total cost of the loan to someone whose credit score is much higher.
You see, when it comes to credit score, the higher the better because your credit score directly impacts that interest that you will pay on the money you borrow for your home.
The reason interest rates will vary based on your credit score is because your credit score is an indication of how risky it is to lend money to you. If you have a history of defaulting on loans or paying your loans back late the banks will perceive, rightfully or not, that you are at a greater risk of defaulting on your loan making them step in a foreclose on the property.
Your Credit Score Will Affects Interest Rates
At the time of writing, and based on the national average as seen at myFICO.com, if your credit score is between 620-639 you will qualify for a mortgage with an interest rate of 5.596%. Now when you compare that to if you had a credit score between 760-850, you will see how beneficial a high credit score can be when the same mortgage will be offered to you at 4.007%.
If your credit score is low, it can essentially bully you into needing to accept a higher interest rate on your mortgage. That difference between the top range and the bottom range is “only” 1.589% which might not sound like a lot. But, trust me, it adds up to a LOT of money over time. If you don’t believe me take a look at these two examples:
The Tale of Two Credit Scores
Home price: $318,900 which is the average price of a new home in the USA as of August 2013
Down payment: $63,780 (20% of purchase price)
Low credit score interest rate: 5.596%
High credit score interest rate: 4.007%
Amortization period: 30 years
Mortgage Type: 30-year fixed
Low Credit Score Outcome
Monthly Payment: $1,463.95
Total Interest Paid: $271,900.87
High Credit Score Outcome
Monthly Payment: $1,219.01
Total Interest Paid: $183,724.21
If you purchased the exact same house with a credit score of 760, or above, you would save a total of $88,176.66 over the life of the loan.
It gets worse. If you invested the $244.94 per month that you would be saving each month, thanks to your high credit score, into the stock market and realized a modest average annual rate of return of only 6%, you would have $246,045.91 saved by the end of the 30 year mortgage term.
Are you seeing why having a high credit score is so important?
Why You Need To Know and Monitory Your Credit Score
Hopefully you can see how important it is to keep your credit healthy. If you do not know your credit score you should click here and sign up for Equifax credit monitoring.
Monitoring your credit on an ongoing basis not only protect your credit score by ensuring the accuracy of what is being reported by the 3 nationwide credit reports but it is also one of the best ways to protect yourself from identity theft.
If your credit score is lower than you want it to be, you should start taking the necessary steps today to start repairing your credit. Improving your credit score is not impossible but it does take time and a well laid out plan to raise your credit score faster than by simply allowing time to heal all wounds.
Has your credit score affect you when you were trying to get a mortgage? Were you denied or forced to pay a higher interest rate? What have you done or what will you do to start improving your credit today?