How Credit Score Affect Home Loan

If you are applying for a home loan, there are several factors you must go into before making the final decision. Some of those factors include your employment history, saving balance, and the size of the loan. Even with these factors, one of the most important parts of your home loan application is your credit score.

How Credit Scores are Factored

Stated by a credit repair Houston expert, your credit score comes from a model called FICO. This model places your credit score in a range between 300 and 850. Anything below 579 is considered poor, and good credit is 670 and higher. Exceptional credit is 800 or higher.

Credit scores are based on a few factors. The FICO score includes five categories:
     Payment history
     Amounts owed
     Credit history
     New credit
     Mix of credit

The categories are not weighted equally. Payment history and amounts owed make up 65% of your credit score.

Lenders have the final say in whether or not you get a home loan. In many cases, you can get a home loan even if your credit is mediocre. But, your credit score will affect the terms of the loan. For example, people with higher credit scores, especially in the exceptional range usually get lower interest rates than those in the good range.

Saving Money with a High Credit Score

Why does this matter? Mortgages usually last for 15, 20, or 30 years. So, interest rates matter. Consider the differences in payment for a $200,000 home loan. If you get a loan with a 4% fixed interest rate, your monthly payment over the course of 30 years is $955. When you are finished with the loan, you will pay $343,800 for the loan.

But if you get a better rate of 3%, your monthly payment goes down significantly. Instead, your monthly loan payment is $843. After 30 years, you will have to pay $303,555 for your home.

When your credit score is high, you could save over $40,000 through the life of your loan, and you have $112 more per month to spend on other things.

What Happens If Your Credit Scores are Low

Since lenders are in control of whether or not you get a home loan, your credit score could force them to ask you for a co-signer. Lenders use your credit score to determine their risk. Even though FICO is the organization that determines the score, it is reported by different agencies. Each agency has a slightly different way of reporting, so your credit ranking could vary.

If you are unsatisfied with the score your lender used, you could ask them to pull a credit report from a different agency. You might also want to check your credit score to see if it is accurate. It is common for errors to appear on credit scores.

Keep in mind the way that credit scores are tabulated. Since credit scores value payment history the most, a few late payments - even just a few days late - could negatively affect your score. It can take time to increase your credit score; the best way to do this is to make payments on time, every single month.

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