If you’re thinking about buying a home sooner rather than later, you may have a to-do list that includes things like finding the right real estate agent, narrowing down the neighborhoods you want. you see it, and even check what is possible. mortgage. But there’s one big task you’ll want to add to your list: updating your screen credit score.
Personal finance guru Humphrey Yang recently revealed the importance of having good credit and being a reliable borrower. on Instagram by discussing two different mortgage applicants with different histories. The person who missed a payment on a loan was given a higher monthly payment (including interest) than the person who repaid a previous loan on time. This resulted in the borrower paying $137,000 less in interest over the course of the mortgage! I don’t know about you, but $137,000 is a lot of money to me.
Let’s take a closer look and break this down into real numbers to see what a high credit score can do for you in your search for buy a house.
It is a story of two points
Let’s say you’re applying for a mortgage loan and you have a credit score of 620. This is the minimum acceptable score to be approved for a standard loan (ie, one that is not sponsored by the government such as the FHA or the VA loan would be). The amount you’re borrowing is $350,000, and you’re getting a 30-year fixed-rate mortgage, the “world’s best mortgage,” according to Warren Buffett. With your 620 credit score, as of this writing and current mortgage rates, you would be looking at a monthly payment of $2,535, and paying a total of $562,538 in interest on your mortgage.
But what if you approach the process with a score of, say, 700? You qualify for a low interest rate (because lenders will see you as a low-risk borrower), giving you a monthly payment of $2,211, but You will pay $446,074 in interest — or $116,464 less than our original estimate.
How to improve your credit score
It’s easy to see from the numbers above how a higher credit score can be beneficial if you’re looking to invest in your home purchase. And, let’s face it, Home ownership is expensive just as it is. So what can you do to get your credit in top shape before you apply for a mortgage?
- Debt payments: Dig in and focus on it pay down your existing debts, especially if the interest rate is high, such as debt. This will free up some cash to save for your down payment and improve your debt to income ratio, another number you’ll want to keep as low as possible. then get approved for a mortgage.
- Improve your payment habits: Your credit history makes up 35% of your credit score, so if you’ve been late on your payments, now is a great time to improve your on-time payments.
- Check your credit report: Credit report errors are common, so it’s worth checking yours (you can find your Free credit report every week until the end of 2023) and see if there are any errors. If you find something, you can ask to have it removed.
While you may hate the thought of one more thing to do as you prepare to buy a home, improving your final score should be a priority. top priority. Having a better credit score will save you money on mortgage interest and make you a more attractive borrower to mortgage lenders. And doesn’t that work?
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