While there are several factors which play a role in whether you qualify or a mortgage and how big that mortgage is, your credit score is one of the biggest. Why? Because lending institutions, such as banks, use your credit score to determine how likely they think you are to repay your loan on time and in full.
Typically, credit scores range from 300 and 850. In most cases, individuals with a credit score of 620 or higher are considered desirable mortgage applicants. But, just because you have a 620 credit score doesn’t guarantee you’ll qualify for the loan limit you need or secure the loan at the interest rate you want.
Unfortunately, higher interest rates can cost you dearly. For example, if you qualify for an $80,000, 30-year fixed rate mortgage at a seven percent interest rate, your monthly payment would be $532.
However, if you qualified for the same mortgage with a nine percent interest rate, your monthly payment would jump to $644. This means, over the lifespan of your loan, you’d pay nearly $40,000 more!
What determines this all important credit score? Let’s break it down.
Your Payment History
Your payment history is an excellent indicator of how likely you are to consistently make your mortgage payment on time. Credit agencies look at whether or not you pay your credit cards on time every month. Have you been late? How late have you been?
They also identify if you’ve ever filed for bankruptcy, liens or been taken to collection.
How Extended You are Currently
It’s certainly a good thing to regularly use a portion of your credit limits. This helps you build credit history. But, owing a great deal on numerous accounts can indicate you are over extended.
Your Credit History
When it comes to your credit history, there is no substitution for time. It can’t be bought by paying off your debt in one lump sum. It’s earned by making consistent payments month after month.
New Credit You’ve Acquired
Credit agencies consider new credit more risky, even if you are making prompt payments. Avoid opening a new line of credit just months or days before applying for a loan.
What Kinds of Credit You Use
In most cases, your credit score is better if you have used more than one kind of credit. For example, these might be installment loans, credit cards or a mortgage.
Is your credit score not quite where you’d like it to be? Check back soon. We’ll be discussing what you can do to improve your credit score.