When purchasing a home and applying for a mortgage, one of the most important factors your bank considers is your credit score. This number can make you ineligible to purchase a home or it may help you save some money during this large transaction.
What is a Credit Score?
Your credit score is a combination of your financial decisions. This three-digit number is comprised of many factors such as:
- The types of credit you currently possess
- The length of time you’ve had accounts opened
- Your current debt
- Your payment history
- If you’ve recently had any credit inquiries
How Does Your Credit Score Affect Your Mortgage?
Your credit score plays a critical role in your mortgage. If your credit score is too low, banks may be wary to approve the financing. If they do approve your loan application with a poor score, you can expect a high-interest rate. This will cost you significantly over the course of the loan.
For example, if you choose to borrow $500,000 with a 3.0% interest rate for 15 years, you can expect to pay up to $121,000 in interest. For that same loan, if your interest rate is increased to 3.5%, you will pay $143,000 in interest. That is a difference in $22,000.
Additionally, your credit score can affect where you receive the financing to purchase a home. The better your credit score, the more banks will be inclined to work with you. More banks equal more options to shop around to find an ideal rate. You want a score greater than 700 to purchase a home. If so, you will be able to apply for a home loan at most mortgage companies, credit unions, and banks.
What if I Have a Poor Score?
If your credit score is low, it may be in your best interest to wait and purchase a home until you can improve it. Luckily, there are several ways you can boost your score. A few tips to improving your credit score include:
- Pay all bills on time and in full each month.
- Do not use more than 35% of your available credit.
- Keep credit lines open and active.
- Pay off as much debt as possible.
- Do not open numerous credit lines in a short period of time.
Keep in mind that it will take some time to build your credit and it is not something that you can change overnight.
When purchasing a home, you must prepare yourself financially and make strong financial decisions. This will not only help you save money, but it will improve your credit score as well.
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