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July
5

Credit Score and Mortgage
One of the first things you have to do when buying a home is take an in-depth look at your financial situation. Since most people buying a home have to apply for a mortgage, it is imperative that you know what lenders will be seeing when they investigate your creditworthiness. Getting your credit report and knowing your score will be one of the first steps you want to take. But you might be wondering how much it really matters. The truth is it matters a lot. Here's why.

Ways your credit score affects a mortgage

For most people, buying a house is a really large transaction. Getting a lender to take a risk on you with that amount of money involved, means you have to demonstrate some creditworthiness. Because of the amount of money and length of the loan, it isn't as easy as getting a credit card or a car loan. Your credit score needs to at least be reasonable to get considered for a mortgage. And the actual number matters a lot more.

  • It's the main factor that determines the interest rate you'll get
  • It determines what kind of loan products are available for you
  • It may affect the amount of money lenders are willing to qualify you for.
  • It can also mean you won't have to pay points or private mortgage insurance, which will save you money.
  • It will affect the amount of down payment you're required to make.

A lower interest rate can make a difference of tens of thousands of dollars over the life of your home loan. The amount of money you can qualify for can make a difference if you're looking to move to a better neighborhood or to the "hot" neighborhood before prices start to soar. Lenders usually require higher credit scores in exchange for lower down payments.

What credit score do you need?

Your credit score isn't the only factor considered when you get a mortgage. Lenders look at the whole financial picture, so the amount of your down payment, income, and debt to income ratio also matter significantly. So just because you're credit doesn't fall in the range that lenders consider excellent, (usually 750 and up) doesn't mean you're doomed. There are options out there, even if your credit score is in the mid to upper 500's. Different lenders and different types of loans have different requirements. The better your credit score, the more options you'll have, and the more money you can save. So if you need to work to improve your credit score, it's a good idea to do so.

Here's an example…

To really see how the interest rate of your loan matters, you can use an online loan comparison calculator to compare rates. For this example, we'll assume you need to borrow $200,000. At an interest rate of 4%, your base monthly payment (excluding taxes, insurance, and other fees) on a 30-year mortgage is $954.83. At an interest rate of 5% that payment goes to $1,073.64. That is an extra $118.81 per month. Which might not sound like much, but that amount every month for 30 years, means you're paying out an extra $42,771.60! Viewed this way, it's easy to see why your credit score matters and why it's important to improve it if you need to.

Our REALTORS® can help when you're ready to start looking for a home. Contact Margaret Rudd & Associates, Inc. today for more information.