How Credit Score Affects Your Mortgage Loan
A credit score is used to predict how likely you are to repay a loan. It’s based on past credit history and takes into account various factors such as the amount of debt, the type of debt, past payments, and your credit history.
FICO is the most common credit score used and can range anywhere from 300 to 850. This score is important because credit scores have a direct effect on your ability to get a mortgage and the terms of the loan.
Credit Score Affects Your Loan Approval
If your credit score is too low, the bank may not approve your loan. With a FICO score under 620, it will be very difficult (though not impossible) to get a loan.
A potential borrower with a FICO score on the low end of the scale should expect to spend time looking for a lender. You might receive several rejections before finding a willing lender.
In order to have the best options available, a score of 740 or more is recommended.
Your Credit Score Impacts Your Interest Rate
The rate of interest is usually determined by your credit score. The higher your credit score is, the lower your interest rate will be. A person with a credit score of 740 or higher will receive the best possible rates.
This is important because this rate has a considerable effect on your monthly payment and the total amount of interest you pay over the life of the loan.
For example, if your rate is 3.77% on a 30-year fixed-rate mortgage for $100,000, then your monthly payment will be $464.
If you increase the interest rate to 4.59%, keeping all other terms of the loan identical, your monthly payment would be $512.
That adds up to a lot more money spent over the life of the loan. You’ll be paying $17,230 more in interest because of the higher rate.
Other Factors That Affect a Mortgage Loan
If your credit score is low due to past errors, it’s still possible to get a loan. Lenders do not use credit scores as the sole determining factor. They’ll look at your full credit report and also take into consideration your savings, total assets, and current income.
Improve Your Chances of Getting a Low-Interest-Rate Mortgage
There are several ways to ensure that you get better loan terms. If you know that you want to purchase a home soon, pay off your current credit card balances as much as possible and don’t take out any new lines of credit.
It’s also a good idea to save for a down payment that equals at least 20% of the cost of the home. If your down payment is less than 20%, you’ll have to get private mortgage insurance, which can be expensive.
Several months before you start shopping for a loan, be sure to obtain a copy of your credit report. Look it over carefully and correct any errors that may exist.
Understanding how your credit score affects your mortgage loan helps you prepare in advance and ensures you save money in the long run and get the most out of your investment.