Why Your Credit Score Matters When Buying a Home
A credit score is crucial for some of the most critical moments in our lives: being approved for a car loan, obtaining a credit card, and being hired by an employer. Perhaps one of the most important is purchasing a home. Here are the reasons why your credit score matters so much when applying for a mortgage loan:
It Indicates Credit Responsibility
A mortgage is a big loan, and lenders want to be sure they are repaid what they have loaned. A credit score and report show the lender how you have used credit in the past. A good credit score shows the lender you can pay on time and know how to use credit responsibly. A bad credit score indicates a person may have struggled to be financially responsible in the past, and a lender will most likely not want to risk lending to them. Factors such as a low debt-to-income ratio, timely payments, and age of credit are all part of your credit score and determine whether or not you are approved.
It Determines Your Interest Rate
The better your credit score, the more likely you’ll qualify for a lower interest rate loan and down payment. This is because a lender will offer better terms if they feel more confident the borrower will pay back the loan. A percentage or two difference in interest rate may seem insignificant now, but it can add up to tens of thousands of dollars over the life of the loan. To put it in perspective, the difference between an interest rate of 3% and 3.5% over the span of a 30-year $250,000 loan is nearly $25,000.