How Credit Scores Affect Mortgages
Ever since the housing crisis began, you have probably been hearing about credit scores. Credit is needed for just about everything. It is much easier to get a new car loan, an installment loan for a home repair, or a mortgage for your dream home if you have a good credit history. The problem is that the whole idea of credit is confusing to many people and it is not always easy to find out exactly what your credit score is or what it means. One of the biggest mysteries of credit is how exactly it affects a mortgage for a home.
There is no debating the fact that the higher your credit score the better deals you can get. Where mortgages are concerned, you are able to get mortgages that have lower interest rates, higher borrowing limits, and lower monthly payments. The lower interest rates that you pay with a better score is what lowers the monthly payments that you make. Interest is money that is added on to the money that you borrow and increases the amount that you have to pay back over the life of the loan. The lower the rate the less you have to pay to borrow the money.
Credit tells your lenders how much they can trust you. High scores mean lenders will be willing to lend you money while low scores mean they will not want to. Your score, called the FICO score, is determined using a number of factors and a specific formula. The credit bureaus such as TransUnion take these factors into account when assigning a credit score. The factors are your previous performance and how often you paid creditors on time, the amount of money you owe, how long you have been using credit, and what kinds of credit you have. Credit inquiries also count but to a much smaller degree. Your past payment history is the most important factor. Using the FICO score, a lender will use the score and reason codes to decide where you fall on their lending guidelines.
Scores range from 350 to 950. Very few people actually have scores in the 900s. Those who get the best loans have scores that are at least 800. Many lenders require borrowers to have scores in the 700s. However, there are lenders who will consider lending money to you for a mortgage even if you are considered to have poor credit, which is usually considered to be anything below 500, though you will end up paying more in interest. Time is the best method of getting a higher credit score. Be sure to pay your bills on time, pay off any debts you owe, and your score should climb.
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