Today's article is all about credit scores and the impact they have not only on your ability to purchase a home, but how much it costs you over time when you have a poor credit score. Thanks to Satinder Haer of Zillow for this guest article.
Buying a home is one of the biggest financial decisions a person makes during their lifetime. A home purchase is typically a 15- or 30-year commitment involving hundreds of thousands of dollars. Therefore, it’s critical to evaluate whether you’re truly ready to buy a home. Even though your credit score is just one of the factors considered by mortgage lenders, reviewing your credit score can actually help you make an informed choice about your readiness to take out a mortgage loan before you research and find a lender.
Consider these important reasons credit scores assist home buyers in making a smart purchase.
Credit Scores Dictate Interest Rates
Not all mortgage loans are created equal. Lenders use credit scores to determine a borrower’s credit-worthiness and correspondingly, the terms of their loan. FICO (Fair Isaac Corporation) combines credit scores from the three reporting bureaus, Equifax, Experian and TransUnion, into one report for lenders to evaluate. Individuals with high credit scores—around 720 and above—qualify for the best mortgage interest rates. Those with low credit—below 620—tend to receive loan offers with high interest rates or restricted purchasing power.
While the difference between a 3.5 percent and a 4.5 percent interest rate may seem negligible, the financial calculations prove otherwise. Assuming a 30-year loan on a $300,000 home with 20 percent down, the individual with the 4.5 percent interest rate will pay an extra $49,804 in interest over the duration of the loan. Credit scores help buyers who are credit-worthy receive low-interest home loans and encourage borrowers with poor credit to delay their home purchase until they can qualify for better financing.
Credit Evaluation Prompts Review
Many borrowers do not familiarize themselves with their credit history until they begin preparing for a home purchase. However, credit reports often turn up errors that are hurting the borrower’s credit score. While everyone should review their credit report at least once a year and reconcile errors with the respective credit bureau(s), it’s a task that often gets neglected.
Luckily, credit evaluation from lenders typically spurs borrowers to clean up their credit report in order to raise their rating and receive better loan terms. This is a win-win for borrowers because they get better loan terms and improve their credit score during the process.
Credit Scores Indicate Your Readiness to Buy
One of the biggest questions potential homeowners ponder is whether they are ready to buy. Questioning buyers can look to their credit report when trying to determine their readiness; credit scores are one of the key factors that lenders examine when approving mortgage loans.
The lender wants to see that the applicant has successfully borrowed and repaid other, smaller loans or debts to banks in the past. Lenders will not approve borrowers with poor credit for financing; preventing unprepared buyers from taking on a loan they cannot afford. On the other hand, for buyers who determine they have strong credit, visiting a lender can help you determine exactly how much you can afford to spend on a house and get pre-approved.
Credit scores are a helpful tool for potential home buyers. While it can be scary to delve deep into your credit history, it can help you make an informed decision about your home purchase. Take a look at your credit score today if you’re preparing for, or even just considering, buying a home – arming yourself with knowledge can give you the opportunity to improve your credit ranking or realize it’s time to start home shopping.
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