If the time is upon you to purchase a new home, especially in this market, you are going to want the best rate possible. There’s the obvious factors such as the total amount of the loan and how big your down payment is, but how does something like a credit score come into play?
Having the best score possible might just be the ticket in saving you thousands over the course of the loan. If you thought it was the right time to buy thanks to the low interest rates and the large down payment you’ve got saved up, but you are still working on improving your credit, it could be worth it to keep saving while you make the right steps to improve your credit score.
Why Does It Matter?
It’s important because your credit is what’s used by lenders to understand how responsible you are with loans and payments. Having that large down payment is great (and not to be understated) and that’s sure to mean something with the bank, but they are going to see you as more of a risk if you don’t have the best past when it comes to debit and payment habits.
Having a lower credit score doesn’t mean you won’t be able to have a home loan, but it will impact the interest rate. You might not think of that as a large issue if you are familiar with getting other loans, such as a car loan or a loan for a household appliance. Those loans aren’t nearly as large as the typical house price and the loans aren’t for nearly as long.
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A Price That Adds Up
If you have that lower credit score, and therefore the higher interest rate, once the loan is finally paid off, it could be an additional thousands of dollars that you’ve spent throughout the lifetime of the loan.
For example, a credit score that’s in the lower half of the 600s could mean you are paying an additional few hundred a month in interest because the bank sees you as a higher risk than someone else with a better credit history. Again, this is something that might not seem like a massive deal at first, but has the potential to add up to some major numbers once the mortgage is paid off.
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How To Improve Your Credit
Thankfully, credit is often something that you’ll have the ability to improve. With a keen eye on your bills and a house payment calculator handy, you should be able to see your credit improve and how that’s going to impact the house you can afford. Along with paying the bills on time, work to settle any bill you’ve had that’s moved to collections. Having anything outstanding like that can drag your score down considerably. Also, you might have the impulse to close credit accounts you’ve had for years but that not the right move.
Maybe you’ll want to switch to using certain accounts sparingly, but flat out closing the account might not be the bump in credit score you were hoping for. Having long standing healthy credit can improve your overall score.
