Experiences vary for people in different situations, but the traditional path to getting a home loan begins with something like this:
Get your Credit in Shape
I’ve known a few first-time home buyers who found a great home in the perfect neighborhood. The schools were within walking distance and had great online reviews.
The neighbors were super nice and welcoming. They’d already been invited to the next block party.
Everything was lining up perfectly, until… they applied for a mortgage to finance the home and learned they couldn’t qualify for a loan because of their credit score.
Sometimes, even if you do qualify, a lover than ideal credit score can raise your interest rate, and as we’ll see later, a high-interest rate can place an otherwise affordable home out of your price range.
A solid credit history makes home buying easier, and it opens opportunities to save tens of thousands of dollars, and sometimes more, over the life of your loan.
Why Do Credit Scores Matter So Much?
If you were loaning someone $188,000, which is the median price of a home in the United States this year, wouldn’t you want to know whether he or she would pay you back?
Lenders feel the same way, and since they don’t know you personally, they have to rely on credit scores to determine your approach to personal finances.
The lower your credit score, the higher your risk of non-payment. Banks do not like taking chances on someone with a low credit score.
For someone with an average credit score, a lender may hedge its bets by increasing your interest rate.
YOUR CREDIT SCORE HELPS DETERMINE A LOT OF THE CONDITIONS OF YOUR LOAN:
What type of loan you qualify for: subsidized or private, for example. (We’ll get into this more below.)
How much of the home’s buying price you’ll be required to pay up front, usually measured as a percentage of the loan.
How much you’ll pay in interest
That last bullet point is a biggy: An interest rate of 4 percent on a $175,000 loan for 30 years means you’d pay a total of $300,000 if you paid the house off on schedule.
Increase that rate to 6 percent and you’re looking at $377,000 over the next 30 years if you pay on schedule, a difference of $77,000.
An extra $77,000 will add about $2,500 a year to your payment even though you borrowed the same amount.
How Can I Fix A Bad Credit History?
You’ll need patience and diligence to increase your credit score and pave the way for a more favorable mortgage loan in the future.
The good news?
It’s easier than ever to find your credit score and start working on improving it.
Generally speaking, paying your bills on time and paying down excessive debt, especially credit card debt, puts you on the right track.
Steer your finances in the right direction, then be patient.
It can take months or sometimes years to start seeing your score increase.
Stay on top of it, though. Sometimes a credit reporting error can lower your score. When you’re paying attention, you can identify and fix these kinds of problems right away.
Preemptive Credit Watch
Because it takes a while to repair credit problems, and because your score impacts your mortgage so much, we’ve put “Getting Your Credit Score Under Control” first on this list of how to get a mortgage.
Even if you expect it’ll be a few years until you’re ready to buy a house, you can be super prepared by getting on the road to better credit right now.
With this approach, you’ll be in great shape, credit-wise, when it’s time to apply for that mortgage loan.