Before you buy a home and get a mortgage, there are ways to ensure you get a better deal from a lender. The difference can save you many thousands of dollars throughout your mortgage. Taking time to raise your credit score beforehand can enable you to get the better terms you want.
The Savings Potential of a Good Credit Score
A good credit score can help you get a larger home loan, smaller payments, and lower interest rates. How much you save will be determined by several factors, but it is possible to save more than $100,000 on a 30-year fixed-rate mortgage just by having a better credit score.People with a credit score over 760 can probably expect to get the best deals on a home mortgage. If your credit score drops during the approval process, you can expect it to hurt the deal you get. Lenders gladly work with people with a proven track record of handling their finances well by consistently making payments on time and keeping their debt-to-credit ratio at 30 percent or less.
Credit Scores and Loan Types
Different types of home loans can have varying requirements for a credit score. Bankrate provides a general idea of what kind of credit score you need to get some home loans from various lenders:- Most lenders want to see a score of 620 minimum.
- FHA loans require a minimum of 500 with a 10 percent down payment or 580 with a 3.5 percent down payment.
- USDA loans require a minimum of 640.
- VA loans have no minimum, but prefer about 620.
- Jumbo loans require a minimum of 700.
Higher Credit Scores Mean Better Terms
In most cases, if you have a high credit score—generally higher than 700—you have a good credit score. A score of 740 to 799 is very good, and anything above 800 is excellent.The Wall Street Journal revealed the difference between various credit scores and interest rates on Feb. 15, 2023. Here are four interest rates and the effect different credit scores have on the potential savings benefit:
- 760-plus = mortgage rate of 6.06 percent
- 700–759 = mortgage interest rate of 6.29 percent
- 660–679 = mortgage interest rate of 6.68 percent
- 620–639 = mortgage interest rate of 7.65 percent
1. Review Your Credit Report
You can get a free credit report from the three main credit bureaus: Experian, Equifax, and TransUnion. You can obtain one free report annually from each company by going to AnnualCreditReport. Once you have them, review them to ensure there are no mistakes on them—which can happen. If you find mistakes, contact the source to attempt to correct or settle the matter.2. Pay Your Bills on Time
The biggest and most important factor in determining your credit score is whether or not you pay your bills on time. It counts for 35 percent of your credit score. You always want to pay at least the minimum amount on any bill you receive—and be sure it gets there on time.3. Reduce Your Outstanding Credit Debt
How much debt you have compared to how much credit you have is a factor that counts as 30 percent of your credit score. If you have a $3,000 credit limit and have $750 on your credit cards, that is a ratio of 25 percent credit utilization. Lenders prefer that borrowers have less than 30 percent credit utilization, but some will accept 36 percent.If you have a lot of credit card debt, you can raise your credit score by reducing the amount of debt you have. Avoid putting more charges on your credit cards until you are within the 30 percent credit utilization range.
4. The Length of Your Credit History
Lenders want to be able to look back over long periods and know that you have a habit of paying your bills on time. They want to see that you can handle your finances well. It means you should not close out old credit cards even if you are not using them. Your credit history counts for 10 percent of your credit score.5. The Mixed Types of Credit
If you have more than one type of credit, it counts as 10 percent of your credit score. Besides having available credit on your credit cards, they also want to know that you have had or still have other kinds as well. It may include car payments, personal loans, etc.6. New Kinds of Credit
Lenders do not want to see that you applied to several credit card companies and just received them. If so, it could scare them away from giving you much credit because they might be afraid that you might max out your new credit cards and then be unable to make your mortgage payments.While credit scores do have a large part in a lender’s consideration of what terms to give you, other elements will factor in. The size of your income will also have a big role in the decision process.
Down Payment Size Makes a Difference
The size of your down payment will also make a considerable difference in your mortgage rate terms. The larger the down payment—especially when 20 percent or more—the more you save. A 20 percent down payment enables you to avoid Private Mortgage Insurance (PMI), which will help keep your payments more affordable.Avoid making applications for a mortgage after 30 days. NerdWallet says that it will lower your credit score if you do.
After getting your credit score within a good range (at least above 700), start looking for a new home loan. Before applying, check the current mortgage rates first. Then fill out several applications for the best price and terms before signing.
The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
