Monday March 23, 2020
It is vital for anyone buying a new home to know what their credit is score is, and if yours is below 620, you cannot begin too early in the home search to improve it as much as you possibly can. This must be done way before you attempt to secure a mortgage loan of any size. Raising a credit score can take months, but all it takes is some discipline and a plan.
You need to check your credit report for negative information. Negative information includes:
- Missed payments
- Student loan delinquency
- Accounts sent to collection
- Repossessions and foreclosures
This can be dealt with by sending a letter to the credit bureau that generated the inaccuracy on the report and explain to them why it is in error. The bureau has 35 days to look into it and report their findings back to you.
What You Can do Yourself
It seems counterintuitive but doing without credit cards or not taking on any unnecessary loans is not the way to build a credit score. You do need to keep a few accounts open, active and in good standing by making payments before they are due and maintaining low balances in all your accounts.
The Importance of Your Credit Score to Home Buying
Credit scores affect the kinds of mortgages you can be approved for, how much you can borrow, the mortgage rates you will pay and even the amount you will pay for private mortgage insurance.
You will need at least a credit score of 620 to be eligible for a mortgage loan, but the higher the score the better the terms will be.
As an example of what that credit score can cost you can be easily demonstrated by comparing loan terms with a credit score of 625 versus a score of 750. Suppose you are taking out a 30-year mortgage loan for $200,000 with a score of 750. The rate at 3.625 percent would result in a monthly payment amount of $912.
The same loan amount and loan period with a credit score of 625 would give you a rate of 4.125 percent on the loan which would result in a monthly payment of $969. This would be an increase of $20,520 over the life of the loan compared to the borrower with the 750 score.
You also will probably not be eligible for a conventional loan from Freddie Mac or Fanny Mae, which may leave you totally out of the mortgage market, as these two agencies are responsible for loans to 90 percent of homebuyers in the United States.
Private Mortgage Insurance (PMI)
PMI covers lenders for borrowers who put less than 20 percent down on a home. Take the example of the $200,000 mortgage loan—for a credit score of 760 or more, the PMI rate would be .54 for a 95 percent loan for 30 years. The amount paid would be 1,080 per year or $90 per month.
Do the same calculation with a credit score of 679 or less, and the rate for that same mortgage would be 1.75 percent and the yearly payment would rise to $2,300, which is more than double the cost with the higher credit score.
For good, solid advice on financing your home, talk to the loan experts at Landmark 24 real estate services. They have the knowledge, experience and long-term relationships with preferred mortgage lenders to transition smoothly into that new home.