Maintaining Good Credit for a Home Purchase
One of the most critical factors in getting a low-interest rate on a mortgage is your credit score. By being able to show that you’ve paid past debt on time, you show lenders that you’re trustworthy and therefore are less of a risk when giving money to buy a home. However, having poor credit may not take you entirely out of the running. Lenders may still offer you a loan in some circumstances but at a higher rate. If you’re thinking about purchasing a home, here are a few important things to know about your credit.
Check Your Credit – in Advance
The Federal Trade Commission conducted a study which found that one in five consumers discovered mistakes on at least one of their credit reports that might impact their credit scores. When you get your credit checked in advance, if there are errors, this allows you the time to fix them. Common errors can include identity errors, incorrect reporting of account status, data management errors, and balance errors. Once errors are removed, your credit score is likely to improve which could help you qualify for a lower rate when you apply for a mortgage.
Understand Your Credit
Credit agencies don’t make the credit score formula public, but they share how they weigh credit behavior and determine credit score health.
Here are the factors that impact your credit score:
- 35% Payment history
- 30% Amount you currently owe creditors
- 15% Length of your credit history
- 10% Number of new credit accounts you’ve opened or applied for (fewer is better)
- 10% Mix of credit accounts you have (mortgages, credit cards, installment loans, etc.)
How Your Score Impacts Your Monthly Payment*
The rate you’re given based on your credit makes a huge difference in how much you pay. Let’s look at a quick example. On a $250,000 loan with an interest rate of 4.5%, a qualified borrower could have a monthly payment of $1,267. On a $250,000 loan with an interest rate of just 1% lower, 3.5%, the monthly payment could be as low as $1,123 – a difference of $144 per month - $1,728 per year – $51,000 over the course of a 30-year mortgage!**
Dos and Don’ts Once Your Loan is in Process
Once you’ve applied for a mortgage, it’s important to maintain your score.
- Pay your bills on time
- Continue spending as normal
- Talk to your loan officer before making any major purchases
- Apply for new credit
- Make any big purchases
- Change jobs
*Rates are provided for illustration purposes only and may not be indicative of rates currently available in the marketplace. The illustration is not intended to provide mortgage or other financial advice specific to the circumstances of any individual and should not be relied upon in that regard. Actual rates available to a particular individual can only be determined at the time of application Applications are subject to credit and underwriting approval. Restrictions apply.
**Savings, if any, vary based on consumer’s credit profile, interest rate availability, and other factors. Contact Guaranteed Rate Affinity, LLC. for current rates. Restrictions apply.