Buying a home is usually the biggest investment a person will make during their lifetime. The process is quite technical, and there are many things to consider. You shouldn’t start the process without the proper knowledge. Something you should know a lot about before buying a home is your credit. If you’re a true beginner, start with the basics of FICO scores, credit reports and mortgages
The health of your credit as transcribed through your credit score can certainly help or hurt your search for a home.
1. Your Credit Will Determine If You Get Approved
Above all else, a credit score will determine whether or not you are approved for a mortgage. Unless you are independently wealthy and can buy property without a loan, the ability to obtain a mortgage will determine whether or not you will be able to own a home. If your credit score is poor enough, the lender could flat out refuse you. Alternatively, a healthy credit score can result in instant approval.
Before you ever look for a home, take steps to get your finances and debt under control to improve your credit score. It may also be a good idea to try to get pre-approved for a mortgage to save yourself from the hassle of being denied after you have picked a home to buy.
2. Your Credit Will Affect the Interest Rate
The interest rate you will pay on your mortgage is certainly something you should consider when shopping for a home. The interest rate will ultimately determine how expensive it will be for you to purchase a house. If the interest rate is too high, you may not be able to afford the monthly expense.
With a healthy FICO score, you could possibly obtain a mortgage with an interest rate as low as four percent. However, with a worse credit score, that could balloon up to six percent. Typically, a lender will only approve a mortgage that will result in you paying 28 percent of your monthly income towards mortgage payments. Poor credit could result in you only being able to afford much less house or being denied the loan because it would be more than about a third of your monthly income.
3. It Determines How Much Home You Can Afford
As just mentioned, your credit score determines the interest rate you are offered by the bank. The interest rate in turn determines how much home you can afford. With a higher interest rate, you will be forced to purchase a smaller and more modest home. With a lower interest rate, you could conceivably buy a larger and more upscale home.
Even if you are approved for a mortgage with a high-interest rate for a large home by the bank, it may not be a good idea to agree to the loan. If you default, you could go into foreclosure and lose your home to the bank. According to Forbes, there were 1.12 million foreclosures in the United States in 2014.
4. It Can Determine Whether or Not You Can Get a Government Backed Mortgage
Many home buyers take advantage of the mortgages offered by different government programs. For example, “Fannie Mae” and “Fannie Mac” mortgages can allow you to obtain a home loan with a very reasonable interest rate backed by the federal government. However, to obtain such a loan, you will need a FICO score of above 620. Credit score is just one of the factors to consider when deciding between a conventional loan and an FHA loan.
While many people are able to raise their credit score on their own, there could also be errors and inaccuracies in the records of the credit reporting agencies that could be holding your credit score down unfairly.
The most important thing to do is check out your credit score and keep a close watch on it if you are getting ready to buy. Any improvements you can make could save you thousands in the long run of your mortgage loan. Chat with a First Team agent about everything you can do to prepare for your home purchase from your credit score to negotiation tactics and more.
Anica is a professional content and copywriter who graduated from the University of San Francisco. She loves dogs, the ocean, and anything outdoor-related. She was raised in a big family, so she’s used to putting things to a vote. Also, cartwheels are her specialty. You can connect with Anica here.