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A good credit score could save you tens of thousands of dollars if you are planning to buy a house with a mortgage. There are a few major things mortgage lenders check when you apply for a mortgage, such as income, debt, and credit score.
All mortgage lenders check a borrower's income to decide whether or not the borrower is able to pay the mortgage, and they check the borrower's credit score to determine what interest rate they should charge. Borrowers with a high credit score are safer bets for the banks because these borrowers have a proven track record of paying back. A borrower with a low credit score is risky to the lenders because these borrowers are more likely to default and walk away from paying back the mortgage than the ones with a good credit score. Therefore, mortgage lenders charge a higher interest rate to justify their risk in granting loans to borrowers with a low credit score.
Here are 5 ways to improve your credit score. There is really not a shortcut to improve your credit card fast. It takes time to build a good credit history.
You don't need a very high credit score to buy a house. For conventional mortgages, a credit score of 620 is good enough. However, just because you can get a mortgage doesn't mean you will get a good interest rate. A credit score of 620 is lower than the average, and you will likely have to pay a higher interest. As we stated above, the higher the credit score, the less you pay in interest.
If you just got approved for a mortgage, don't rush out to spend money on furniture, or buying a new car on a loan. Doing a lot of shopping will increase the balances on your credit cards and may even impact your credit score. Your mortgage lender may decline your approved mortgage or raise their interest rate. Therefore, you should not apply for additional loans or buy things that may add balances to your credit card. Hold off until you move into your new house.
Not only do mortgage lenders check credit score, if you apply for any other kind of loans, such as a car or personal loan, lenders also check your credit score to determine whether or not you qualify for the loan and at what interest rate. A one-point interest difference may not seem like a lot, but it makes a huge difference if your interest rate is 1% lower on a 30-year loan. The savings on interest could be in the 50k-100k range depending on the mortgage amount and other terms.
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