How Does a Low Credit Score Affect My Interest Rate?
Lenders estimate your ability to pay back money based on your credit score. The risk factor they take on is built-in to your interest rate as a financing fee. Therefore, a low credit score results in a higher interest rate, higher monthly fees, and a higher amount of interest being paid over the total life of the loan.
Referring back to our chart, a borrower with a credit score of 620 would be questionable to an underwriter. While the lender may agree to provide financing, the increased interest rate is factored into the monthly payment. The following chart illustrates the difference in the amount of interest paid over the life of the same loan with three different credit score scenarios.
A borrower who increases his or her credit score from 620 to 720+ can potentially save $601 per month on mortgage payments, $7,214 per year, and approximately $216,432 over the life of the 30-year loan.
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SOURCE: Credit Resource Corp., How Much Does a Low Score Cost You? http://www.creditresourcecorp.com
How Does the Underwriter View My Score?
If you are considering a home purchase, it is in your best interest to make every effort to increase your credit score, especially if you know you have issues you should be dealing with. It is often the case that people are not aware of badmarks on their credit record until they apply for financing for a major purchase, such as a home.
As part of the loan process, we run a credit report for you. But you can take advantage of the opportunity to get a free credit report from each of the three main CRAs: Equifax, Experian and TransUnion. As a sidebar, you can choose to get the free report from all three bureaus at the same time, so you are aware of what information each bureau has collected. Another option is to pull your credit report from one agency, and reserve the right to get your free reports from the other two CRAs as you work on improving your credit standing.
We believe it is best to have the full overview up front. Different CRAs have different methods of calculating these scores, and may also have different information contained within their findings. Consider the adage, "Why jump over nickels to pick up pennies?" If additional reports are needed within a 12-month period from any of the three CRAs, the cost is extremely minimal compared to the potential savings that can be realized by an improved credit score, and if you run a credit report on yourself it will not affect your own score as an inquiry.
The underwriter who is making the decision as to whether or not you should get the loan you are asking for will generally look at the scores generated from all three CRAs. Typically, the score will not be the same from all three reports, and the underwriter will consider the middle score as a barometer.
For more information on your credit call or email
Jason Schiller
Waukesha State Bank
262-244-0303 (Business)
414-659-6347 (Mobile)
jschiller@waukeshabank.com
Brad Koenig
Your Local Home Team-First Weber
www.YourLocalHomeTeam.com
262-719-7393
In the next few posts We will be addressing the following topics.
Disputing Errors On the Credit Report
The History of Credit Scoring
How Does the Underwriter View My Score?
Dealing with Credit Challenges
Do's and Don'ts During the Loan Process
Credit Remediation
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