When you decide to invest in a new home, there are a number of factors that must be considered. From finding the perfect neighborhood to shopping around for a mortgage lender, you'll need to contemplate your approach to ensure you land the home of your dreams.
Your credit history has a substantial impact on your ability to not only qualify for a U.S. home mortgage, but also secure the lowest rate possible. Currently, mortgage rates are historically low, which is likely encouraging more interested homebuyers to check out available homes in their favorite areas and finally apply for a home mortgage.
"Your credit history determines whether you are a trustworthy borrower."
If you're looking at investing in real estate, follow these tips to help ensure you secure the best rate:
Understand why credit history matters
Your credit history determines whether you are a trustworthy borrower. It measures how fiscally responsible you have been over the course of your monetary history. A lender can use your credit score as a tool to see whether you pay bills on time, determine if you can take on more debt and get a complete picture of the the type of borrower you are, noted Zillow. Armed with this information, mortgage brokers can make more informed decisions when they decide whether to provide a home loan for an applicant.
If your credit score is too low, you may not be approved for a mortgage at all. If you are approved, it still impacts the interest rate affixed to your home loan.
The interest rate for your mortgage has a profound impact on the amount of money you pay. In fact, according to Bankrate, a one percentage-point difference between interest rates can save you more than $100 in monthly principle and interest. These savings add up substantially, which is why many current homeowners are looking to refinance their home loans to lock in historically low rates. Therefore, having the best credit score when applying for a home loan is of paramount importance.
"The interest rate for your mortgage has a profound impact on the amount of money you pay."
What is measured
Your credit score measures a few different factors to provide a more complete picture of your financial responsibility. From your credit history to whether you've filed for bankruptcy, your credit score acts as a report card for lenders.
"Lenders look at several variables on the credit report: outstanding debt; the outstanding debt relative to the total available debt; the length of the credit history; and the pursuit of new credit – how many inquiries are on your report," said Matt Hackett, underwriting manager at Equity Now, a direct mortgage lender, according to Bankrate.
MyFICO indicated payment history makes up 35 percent of your credit score, amounts owed makes up 30 percent, length of credit history makes up 15 percent, and new credit and credit mix make up 10 percent each. Knowing how much each category impacts your credit score can help focus your efforts for improving your score prior to applying for a U.S. home mortgage.
Know your credit score
Before figuring out a plan for improving your credit score, you'll need to obtain a copy of your score. Bankrate recommended getting it about a year before you try to purchase a home. This will give you enough time to improve your score and correct any errors that may be present.
"Sometimes people will quickly glance over their information and that's it. But you should take the time and look at the account numbers," said Steve Katz, senior marketing communications executive for TransUnion.
Improve your score
Bankrate indicated having a score above 760 puts you in a great position when applying for a mortgage. If you want to improve your score, you'll want to ensure you follow a few steps.
Jeffrey Scott, FICO's spokesman, indicated keeping balances low, paying bills on time and only opening lines of credit when absolutely necessary will help improve your credit score.
One thing many individuals do in an effort to improve their score is closing credit card accounts once the balance has been paid off. While this may eliminate the temptation to charge purchases to this credit card, it can actually hurt your credit score. Remember the length of credit history makes up 15 percent of your final credit score.
If you are using a few different credit cards, try to keep the balances evenly spread. Cards with only 20 or 30 percent of credit used is much better than using 80 percent of your credit on one card and a balance of zero on your other cards.
By first identifying what your current credit score is, looking for errors and determining how you can best improve it, you can better ensure mortgage approval. In addition, boosting your score can help save you a substantial amount of money over the life of your loan by securing a lower interest rate.