Hopefully this won’t be the first time that someone has told you to to pay all of your bills on time. If it is, we seriously doubt that you should be looking into mortgages and a new home. But if a new home is your goal, good credit should be a concern of yours as well.
Everyone knows that when you make a major purchase—such as a car or a home—and you need help from a lender, you’re bound to get a better reaction depending on just how high your credit score is. Too many people, unfortunately, look at acquiring a mortgage as a “black and white” matter. Sure, there is normally a low limit where lenders will straight-up not permit you to borrow. You should have higher ambitions than simply qualifying for a mortgage however; the relative strength of your credit score will have a dramatic impact on what sort of terms you receive.
Consider two different buyers, both looking for a mortgage on the same $300,000 home. It requires a $15,000 down payment (5 percent down), with the rest of the $285,000 being handled by the mortgage.
Buyer A has a 620 credit score, bordering between “subprime” and “acceptable.” Buyer B has a score of 740, on the fence between “good” and “excellent.” Let’s see just what kind of difference this makes on the rates offered to both.
Buyer A will make monthly principal and interest payments of around $1,440, based on the 4.50 percent interest rate he was offered. Buyer B will get a more generous 3.875 percent offer, which will result in payments coming out to $1,340 per month. That’s a $100 difference, every month, right there.
It gets even more dramatic, however. Both buyers are required to buy mortgage insurance (as are nearly all buyers who pay less than 20 percent of the property’s value as a down payment), and these charges will differ as well. Credit rating is one of the two major factors that go into generating mortgage insurance rates (along with the loan-to-value ratio). Buyer A will pay $273 a month for insurance, while Buyer B will only pay $147. Even though the monthly price of insurance is many times lower than the principal and interest payments, the cost of savings for good credit is even more dramatic: $126.
That means Buyer A pays $226 a month more on the same home, based on his credit. That’s more than $2,700 more paid every year. And remember: Both buyers will be paying for the mortgage over 30 years. Buyer A won’t be paying off his home any quicker than Buyer B; his interest payments are simply higher, although both share the same principal payment. That means his borderline credit will cost him $81,360 over the life of his mortgage.
The moral: If you have a bad habit of not paying bills on time, make sure you fix it before you enter the housing market. Twelve months or more before looking for a home, take all the steps possible to get your credit as clean as it can be (or more) before you apply for a mortgage. If it seems difficult, just think about what the cost will be if you don’t.
Primary Mortgage Residential wants to help you get into a new home, and we offer a variety of resources to help you understand the financial process and how to get the best deal on your way to that home. Use these options to get expert tips on home-buying and shopping for loans.
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