For first homebuyers, there’s a lot of focus on getting your credit score in great shape. Why? Because it totally affects the amount of money and interest rate a lender will offer you.
Put simply, your credit score is a big deal when seeking a mortgage to buy a home.
Explaining how it is calculated is complex, so suffice to say, you should be shooting for a number in the high 600s and 700s. If you can go higher, you’re likely to be offered the very best mortgage deals.
Credit bureau Experian says most consumers have credit scores between 600 and 750.
Those in the 500s should not despair. In my experience, you folks will definitely be attractive customers to most reputable lenders. After all, their business model is to make a profit from your patronage, so they won’t turn you away without reason.
It’s important to remember that the better the credit score, the lower your interest rate should be. A good score can mean a 0.25% or even 0.5% reduction in the interest you’ll be charged, which equates to thousands of dollars over the duration of your loan.
Here are some common questions that young buyers ask, and quick explanations of the solutions.
What’s the deal? – Lenders use a credit score to assess how you manage your money over a long period. It reveals what you owe and the various bank and credit card accounts in your name. If you have a record of missing payments, you’ll be seen as a risk. Lenders use a so-called “FICO score” designed for the mortgage business.
How does FICO work? – It breaks your record into five parts. 1.) History (35%); 2.) Available credit being used (30%); 3.) Age of your credit profile (15%); 4.) Mix of debt types (10%); 5.) Recent activity (10%).
Is it accurate? – Yes, for the most part. But mistakes are made. You can appeal your credit score with organizations like Experian, Equifax and TransUnion.
Should I worry? – A credit score is so critical to the application process and cost of a loan that you should address any problem, or work to improve your credit score. Don’t worry about it, just address any issue.
How do I fix my credit score? – Pay your bills on time and smash credit card debts. Issuers report your payment behavior to credit bureaus every 30 days, so proactive steps will increase your score quickly. A credit repair company can also assist you.
NOTE: The information in this article is general in nature and provided as a market overview only. Always consult your financial advisor or accountant for advice specific to your personal circumstances.