Are you thinking about buying a house in the next few years? Then your first move should be building up a good credit score. Here’s why.
If you are taking out a mortgage, it is most likely the largest loan you take out in your lifetime. A good credit score might be the key to your receiving the approval for a mortgage. More importantly, it could measurably influence the mortgage rates. So before you search for a real estate agent near me on your browser, you might want to work on establishing a good credit score to ensure that your mortgage sanction would not have any obstacles.
Lenders are looking at established credit patterns to see whether you are a risky investment or not. To make that decision, they often rely on a credit score that summarizes a person’s financial history. A bad credit score might hinder you from getting approval, or when you do, you would be paying high mortgage rates. On the other hand, higher scores could get you low-interest rates and even a lower down payment.
If you weren’t already working on your creditworthiness, it is high time that you do it, especially if you have home buying in mind. Luckily, there are ways you can improve.
Which is a Good Score for Mortgage Approval?
The median credit score is 759 for mortgages approved in the US in 2019. Only 10% of the mortgages were taken out by those with credit scores below 647. That said, these conditions also vary from lender to lender and the type of loan you are applying for.
Relatively, Federal Housing Administration loans have a lower credit score requirements of any mortgage. A score of 580 or above can get you a low down payment advantage, currently at 3.5%. Whereas, a score above 580 would get you a down payment at 10%.
It is simple, the higher the credit score, the more likely it is to get a mortgage approval, along with low mortgage rates.
Factors that Affect your Credit Score
The obvious thing to start is by checking your current credit score. The internet has many platforms to find out the current rate. If you want more accurate results, you can also consult a financial advisor. In general, these are some factors that influence your score.
- Credit card use compared to the total limits
- Bill payment history
- Debt level that makes up for 30% of your score
- Age of credit history, and
- Number of credit inquiries within the last 12 months
At this point, you should also note that, while income, bank balance, and employment status will influence your mortgage approval, it does not affect the credit score in any way.
How to Improve Your Credit Score
By paying bills on time and reducing your debts, it is indeed possible to elevate your score. Begin by paying the smaller dues and then work your way up. While it is feasible, depending on your circumstances, it might take a long time to improve your score this way. That is why it is crucial that you plan ahead before looking at reviews of real estate agents and listings.
Other Ways to Make Property Purchase Easier
The mortgage might be the most significant piece, but there are a few additional ways you can prepare financially.
- Save up Down Payment
As mentioned above, a credit score can influence down payment, and that can further affect mortgage approval. A 10 to 20% of upfront payment is standard; however, the more money you can put up, the stronger your offer would appear.
- Avoid Moving Money
Your bank accounts and credits would be under the scrutiny of the lender at this time. It is best not to make any large purchase or transfer money when you are waiting for loan approval.
- Consider the Hidden Costs
The expenses of home purchases extend to the closing costs, which include taxes, fees, and insurances. You would also have to consider inspections, moving in costs, and more.
If you are reading this article, then it’s evident that you are on the right track. While getting your score in shape might not be as interesting as house hunting, neglecting its importance could cost you financially for the next thirty years.