If you are hoping to buy a home in the next few years and get a mortgage bad credit should be on your mind. It pays to start understanding your credit score since your credit score has a huge impact on the home buying process.
Taking on a mortgage is likely the biggest loan you will take out in your lifetime and getting as low of an interest rate as possible is important for this. Until you actually look at the numbers, it can be hard to see just how much a credit score matters in the process.
Using a calculator, you can see how your credit score will have an effect on your mortgage rate, the monthly payment, and the total interest paid.
For example, a credit score of 760 and higher can give you a monthly payment of $1,626 on a loan amount of $350,000.
With a credit score of 620, that payment increases to $1,960 with the same loan amount. Not only will your monthly payments be higher, but the total interest paid will also be much higher.
If your credit score is 760 or higher, the total interest you will be paying on this example loan is $235,529.
If the score is 620, the interest payments increase to $355,485. This is greater than the original amount of the loan. Even if your score isn’t at the lowest end of the range, you can still feel the financial impact.
If you don’t plan on staying in your home for the full 30 years then maybe the total interest payment isn’t a concern for you. This is why you also want to consider your monthly costs. The difference of almost $300 a month can make a huge difference when it comes to other items in your budget.
How Your Credit Score Is Calculated
The main reason your credit score is so valuable to lenders is because a lender will rely on it to determine how risky you will be as a borrower. Even if a credit score isn’t the prefect indicator, it is the standard that is used.
There are five main factors that are used to calculate your score. Payment history will account for the majority of the score.
The other factors are credit utilization, length of credit history, age of the accounts you have, and your credit mix. One of the tricky components of the score is credit utilization. This is how much of your available credit you are using on each card.
Checking Your Credit Score
If you need a mortgage bad credit scores can certainly damper the process, so it helps to check your credit score before you apply and, if there is time, work on improving it.
In the past, it was impossible to check your score without having to pay for it. However, now you can check it for free from many different places.
Improving the Score
It does take time to improve your score and it is best to have the highest possible score when applying. The main thing you can do to help your score is keep your accounts in good standing and don’t fall behind on payments.