Credit Issues Affecting a Home Mortgage

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Education & Training with Realities and Dreams

Do you have a low credit score and are trying to buy a house?

Getting a home mortgage loan is a daunting task for some of us.  If you don't have good credit, it becomes even harder.

However, there are options for people with lower credit scores. 

I want to talk about a few things that we can do to help our situation, but first, let’s talk about how much more money we will pay if we have a low credit score.

Your Score Impacts Interest Rates

Going from a 760 score down to a 635 score can lead to more than a 1.5 percent increase in your home mortgage interest rates.

This means on a 200,000 dollar home loan your monthly payment will be almost 200 dollars more per month.

Over the life of the loan, for 30 years, you will pay near 70,000 dollars more in interest! 

*** These numbers are comparing a 4.1 percent interest versus a 5.7 percent interest rate.  Please keep in mind interest rates vary! ***

Credit Score Tiers

Exceptional = 800 to 850

Very Good = 740 to 799

Good = 670 to 739

Fair = 580 to 669

Very Poor = 300 to 579

As you can see, in my example above, I was comparing an individual with very good credit to an individual with fair credit.

Is there anything we can do to improve our situation?  Yes, there is, so let’s talk about those things.

I would suggest you do these things BEFORE you buy your home to save you thousands of dollars over the coming years!!

Improve Your Credit Score

Get a copy of your credit report and look for errors.  I suggest you get a copy of from all three credit bureaus.  If you have any errors, get those fixed.

If you have credit card debt, pay it down, as low as you can get it.  The general rule of thumb is to be below 30 percent credit utilization.  This accounts for 30 percent of your score!

 Do NOT make late payments!  If you have any late payments being reported on your credit report, dispute those items.

This goes for any negative item on your report.  Dispute those items with the credit bureau to potentially get them removed!

Save a Down Payment

Having a down payment can save you a substantial amount of money in interest and on your monthly payments.  This is all dependant on how much of a down payment you make.

Using the same example from before, the individual with fair credit, and the 5.7 percent interest rate has now saved 25,000 dollars for a down payment.

The monthly payment now dropped to just over a thousand, saving 150 dollars per month. The interest paid dropped from 217,000 to 190,000 dollars over the life of the loan!

Now, if you take some steps to improve your credit score AND save a down payment, you can potentially save another 60,000 dollars in interest!

Do you have an emergency fund?

If you do NOT, please, I cannot stress enough, save up an emergency fund before buying your first home!

When things go wrong, and they will go wrong, you will put yourself in bad credit situations when dealing with those things.

For example, if your air conditioning breaks in July, and you have no emergency fund, your credit card is going to be used!  It doesn’t take long with just a few emergent situations happening to have your credit utilization climb past the recommended maximum of 30 percent!

Here are a few articles that can help you save more money!

9 Surprising Money Habits of the Wealthy

16 Awesome Money Saving Challenges: Start One NOW!

You can find more personal finance advice here!

Posted by

Carey Zielke

 

 

 

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