Missed a few revolving payments or paid late on your credit cards and thought it wouldn’t haunt you later? Well if you’re wondering how credit scores affect home buyers mortgage rates-the short answer is a great deal.
Don’t be overly concerned if you only have a few missed payments in the course of your life. But if you’ve been struggling to stay on top of your bill payments and/ or you’ve maxed out on your credit cards, then don’t be surprised if your credit score slips and negatively impacts your borrowing capability and rate.
Credit Scores range from as low as 300 to 850, whereby 850 is the best score one can get. Here’s how mortgage lenders view your credit score overall. Said simply the higher your credit score, the lower your mortgage rate which could equate to over $100 in additional monthly payments. I don’t know about you, but saving an additional $100+ per month sure beats wasting it.
How credit scores affect home buyers mortgage rates
Your credit score breaks down this way: 30% amounts owed, 35% payment history, 15% length of credit history, 10% types of credit used, 10% new credit. Mortgage lenders evaluate those variables to check the potential home buyer’s risk level prior to issuing an loan approval and final mortgage rate. Essentially, they’re mitigating risks in hopes that the borrower will not default on their loan. For example, to qualify for a traditional conventional 30 year fixed rate loan, a minimum credit score of 650 is required. Should it be lower, you can still qualify through a FHA loan however you’ll need a minimum credit score of 580 (as of 1/2015).
Now that you’re more educated on what lenders want in a credit score, here’s what you can do next:
1. Time to run a credit check, free and paid (with credit score)
For a quick FREE annual check up, head to Free Annual Credit Report to get an overview of your report. If there are erroneous credit card balances, open accounts or collection items, now’s the time to correct them. Another option is using Credit Karma which offers you a free report WITH your credit score. Remember, your credit score is what mortgage lenders use to assess mortgage rates.
Another option is to order credit report’s from the three leading credit bureaus: Experian, Equifax, Transunion and review all three for any errors. Should there be a mistake, simply utilize their credit dispute form on their website.
Photo credit: Credit Dispute Form-Experian
2. Improve your credit score
Let’s say you ran your report and your credit score is on the lower end, it’s no reason to feel discouraged. Here’s your opportunity to boost it and evaluate how you can automate your bill payments to avoid late marks. Perhaps you’ve maxed out on your credit limits? Figuring out how to work overtime and/or start a side hustle will help reduce your debt burden, in turn improving your credit score.
3. Be patient while your credit score improves
Depending on your report findings, MyFico and Credit Repair Score Estimator has a credit simulator tool that allows you to run hypothetical scenarios to determine how your credit score can improve. However if you have delinquencies, be informed that those can remain on your credit report for up to seven years.
Bottom line is IMPROVE your credit score because credit scores affect your mortgage rates and dictates the capability of a home buyer’s chance of securing a mortgage loan. However, congratulate yourself on this process! Even if your credit score is less then stellar know that with a little bit of credit clean up planning, you’ll be well on your way to great credit scores!
How’s your credit score and what did you do to improve your score? How long did it take for it increase? Comment below because your constructive tips can help the next home buyer.
