First-time homebuyers often find the process of purchasing a home overwhelming. One of the most concerning parts of the process can be applying for a mortgage and determining whether your credit score is high enough. There’s no denying that establishing a good credit score is one of the most important things you can do before starting to look for a home. This is because credit scores dictate many aspects of your mortgage, including approval, interest rates, and more. This article will discuss the importance of credit scores to buy a house and how to improve yours before starting the homebuying process.
What Is a Credit Score?
A credit score is a three-digit number between 300 and 850 that shows banks and lenders your history as a borrower. The majority of people cannot buy a house outright and require a home loan to do so. Lenders will look at your credit score and gauge your credit history before accepting or rejecting your mortgage application. Credit scores show them how you have handled loans in the past, with higher scores showing your reliability as a borrower.
Why Is a Credit Score Important for Buying a House?
Because credit scores show lenders your history of handling money and loans, they’re able to decide whether or not to accept your mortgage application. Whether or not your credit score is “good” or “bad” is subjective and depends on which type of loan you’re applying for. However, this is how credit scores impact the homebuying process as a whole.
Higher credit scores show lenders that you’re a reliable borrower. As such, they may choose to reward you by approving a loan with a lower interest rate. The higher your credit score, the lower the interest rate you’ll have to pay on your loan. This is because the lender will consider you a low risk and will feel confident in lending you the money needed for a mortgage. Even though the difference in interest rates may not seem large at first, if you factor in the interest over the entire mortgage period, this easily adds up to thousands of dollars.
Type of Mortgage
There are many different types of mortgages available, including conventional mortgages, adjustable-rate mortgages, FHA loans, and VA loans. Credit scores affect which type of mortgage you qualify for. For example, you usually need a higher credit score for a conventional mortgage rather than a government-backed mortgage. For most conventional mortgages, you’ll need a minimum credit ratio of at least 620. However, this minimum is much lower for government-backed loans, like FHA and VA loans.
Total Loan Amount
In addition to affecting interest rates, credit scores can also impact the total loan amount you qualify for. This, in turn, will limit the houses you’ll be able to consider. A loan-to-value (LTV) ratio is the percentage of the property’s appraised value that you can borrow. Youu can be eligible for a higher LTV ratio with higher credit scores.
Private Mortgage Insurance Premium
Another reason credit scores are an integral part of the homebuying process is because they can impact your private mortgage insurance (PMI) premium. If your credit score isn’t high enough, you may have a higher PMI premium and, thus, a larger monthly payment.
In many cases, credit scores can affect the amount of your down payment. While a 20% down payment isn’t always necessary, this depends on your credit score. Those with higher credit scores may have to put down less upfront. Individuals with lower credit scores may be required to make larger down payments.
Improving Your Credit Score to Buy a House
As we’ve demonstrated, it’s in your best interests to work towards a good credit score to buy a house. If your credit score needs work, don’t worry. Fortunately, there are steps you can take to improve it.
Pay Your Bills on Time
Your payment history is an important part of your credit score. If you want to strengthen your credit score, paying your bills on time is one way to work towards this. Always pay your accounts either on or before the due date.
Review Your Reports
There are three major credit bureaus you can request a credit report from. These are Experian, Equifax, and TransUnion. You’re eligible for a free credit check once a year. Take advantage of this and review your reports to see your credit score and the factors affecting it. If you see any mistakes that have hurt your credit score, you can take steps to resolve these.
Pay Attention to Credit Utilization
Credit utilization is how much of the available credit you’re using. This makes a significant impact on credit scores. Using less of your available limit can help you maintain lower balances. Keeping your debt balances low can make a difference in credit scores. Experts recommend 30% or less credit utilization.
Improving credit scores takes time. It’s not an overnight process and can take up to six months to create a difference. If you’re planning on starting the homebuying process, start making these changes to improve your credit score in advance, so it’s ready by the time you decide to start looking for a home.
Robert DeFalco Realty Can Guide You Through the Home Buying Process
Dealing with credit scores to buy a house can be frustrating. The entire home buying process can be a challenging one if you don’t have the right resources to help you. One such resource is an experienced real estate agent to guide you through the entire process. At Robert DeFalco Realty, we have many experienced realtors who can help you during this exciting time in your life. Visit our offices throughout New York or call us at 718-987-9700 to get in touch with our buyer’s agents. Alternatively, you can contact us online here. We have experience in both residential and commercial real estate and can help with all your real estate needs.