If you are looking into buying a home, the interest rate you receive on your mortgage will directly affect how much total cost you will pay over the length of your loan. A person’s credit score directly impacts the cost of mortgage interest rates, and if you have a higher credit score, you will generally qualify for better mortgage interest rates. If you are looking to purchase a home and have questions about your credit, our loan specialists at Foundation Mortgage can begin to help you improve your credit score in order to secure a better mortgage interest rate and and potentially save you a great deal of money. We are located in the areas of Knoxville, Maryville, Lenoir City, Oak Ridge, and Gatlinburg, Tennessee, contact us today for a consultation.
How Your Credit Score Can Affect Your Mortgage Rate
Your credit score affects the types of mortgages you can become approved for, how much money you can borrow, the amount you will pay for private mortgage insurance, and the mortgage rates you will ultimately have to pay. Mortgage lending is based upon risk-based pricing, so lenders will increase the cost of a mortgage for every risk that is connected with your credit profile. Therefore, you will pay a higher mortgage rate the lower your credit score is, which means you will end up paying more money over the period of your mortgage. If your credit score is higher, that proves to lenders that you are more likely to pay back the money on time and meet your financial obligations.
How Does Credit Scoring Work?
Your credit score is usually calculated using the FICO scoring model and is obtained from your credit reports that are compiled by credit recording companies. The reports usually include history of your payment habits with money that you have borrowed, for example, the balance on your credit cards, length of your credit history, and how much overall debt you owe. FICO scores range from 300-850, and a score of 670 typically is considered a “good” credit score. It is important to note that most conventional loans do require a credit of 700 for loan approval. The higher your credit score is, the lower your interest rates will be, plus you will have more flexibility with your lender on other loan requirements, such as the down payment amount and term length.
Improve Your Credit Score to Get a Better Rate
Even a slight change in your credit score could make a great difference in the amount you have to pay, potentially saving you a great deal of money. There are many ways you can improve your credit score, including:
- Pay down your credit debts – focus on paying off the loans with the highest interest rates first one at a time, while ensuring that you pay at least the minimum payments on your other debts
- Monitor your credit score and check for errors – any errors can affect your credit score. Check regularly to verify there are no problems with fraudulent charges
- Keep your accounts open – even if a credit card is paid off, it could be advisable to not close the account so that the credit limit increases. Higher credit limits improve your score, but it is important to remember to not acquire more debt with the paid off accounts
Get Help Understanding Your Credit Score
If you are looking to purchase a home, it is necessary to understand how your credit score will affect your mortgage rates. If you are located in the areas of Knoxville, Maryville, Lenoir City, Oak Ridge, or Gatlinburg, Tennessee, Foundation Mortgage can help answer your questions and help you secure the best interest rate for your new home. Contact us today for a consultation.