How Your Credit Score Can Act Like A School Yard Bully

How Credit Score Affects Mortgage RateIf 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

Credit Mortgage ApprovalIf 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

Assumptions

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

Credit BureausHopefully 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?

Related

Become a VOSA Insider
Enter your email address below and you will get instant access to exclusive content only for VOSA Insiders.

Comments

  1. Josh says

    I damaged my credit score by missing one payment on a loan I had a while back. It’s amazing how much it affected my credit score. I am thinking about buying a home sooner rather than later and I plan on getting some credit repair counseling to see what I can do to raise my credit score.

    • says

      Josh, thanks for reading and leaving a comment :). It is amazing how much one missed payment can hurt your credit. Rest assured that if you keep making payments on time each and ever month from this point forward your credit score will improve over time. You can also see if your credit score can be helped by some credit repair specialist by having a free credit score consultation.

  2. Jane says

    I’m just starting to look to buy my first condo. I’ve been saving for years and finally have enough money for the down payment. My Realtor suggested I go get pre approved for a mortgage and that is where I found out that a missed payment to a store credit card from a few years ago has devastated my credit. I now have to buy a cheaper condo because the monthly payments are going to be higher because of the higher interest rate. This sucks. I don’t think I’m going to be able to get a condo in the part of town I had hoped and planned on for all these years of diligent savings. Do you think I can increase my credit score quick enough to help me with this cono purchase?

    • says

      Jane, don’t worry… you are not alone. I’m not sure how quickly you can get your credit score up but there are some good testimonials from people who saw increased in their credit score during the first month of working with this credit repair company.

      The higher you can get your credit score before you sign the mortgage paperwork the less interest you will pay over the life of the loan so, in my opinion, it’s worth looking into.

      Good luck with the condo search!

    • says

      I think you have just inspired my next post: “How Your Income Can Act Like a School Yard Bully”.

      Great job on having and maintaining a high credit score. When you’re ready for that 5th Ave penthouse at least you won’t be spending extra money on interest payments!

  3. says

    I have a pretty good credit score, but haven’t looked into a mortgage just yet. Though I may be doing that soon. My high credit score has got me approved for some great credit cards giving out big bonuses. Although I have stopped that the past year since I’m looking into getting a mortgage.

  4. Andy says

    I’ve been thinking about applying for some new credit cards to get some bonuses but I’m also planning to buy a new house next summer. Should I wait on applying for the new credit cards until after I get all my mortgage financing done? Thanks!

    • says

      I would wait until you have buttoned up your financing and closed on your home. Bonus points for getting new credits cards so you can travel for free is great but not as great as savings tens or hundreds of thousands of dollars on interest payments over the life of your mortgage.

  5. Lilly says

    My credit score is lower than I want thanks to a wild credit card spending during my college days. I’m making sure to keep current on my payments and pay down my debt as fast as possible in hopes that my credit score can go up before I buy my first home soon.

    • says

      Oh yes, the wild college years. If the only thing that remained form those years were the friendships and memories we’d all great. It sounds like you’re still paying for those crazy college years when it comes to your credit score. Since you’re planning to get a mortgage to buy a property sooner rather than later I would look into seeing if there are ways to repair your credit with a free credit score consultation.

      If you have late payments, etc. there is a chance that the pros can help you get those removed long before they are supposed to be removed. Each time a negative item on your credit score is removed it should help your credit score. Thanks for stopping by and leaving a comment.

  6. says

    I’ve always had a good credit score, which is very helpful. As a result, I got a really good rate on both my car loan (which I only had for a year and a half) and my mortgage. Credit scores aren’t everything but they sure can be helpful.

    • says

      Great job on having a good credit score. You’re right, they aren’t everything but they are very important when borrowing money. Thanks for the comment!

  7. Dana says

    I have a great credit but I also work at protecting it as well. Because as you pointed out, your credit score is important to Banks and Lending institutions as a guide as to whether or not you will pay back the loan on time. So great information and points in your article, thanks for posting it.

    -Dana

  8. Dana says

    You are most welcome, also thanks for the reference to “Kids are expensive….” I’ll have to go back and read this! Thanks again.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>