How Your Credit Score Affects Buying a House
Purchasing a home is a huge investment. For many people the purchase of a home may be the largest investment that they will ever make. There are many factors that determine whether consumers receive a loan to purchase their homes. Lenders want reliable borrowers as customers for their home loans. Therefore, it is important to learn the ways in which a credit score can affect buying a house.
Ways Your Credit Score Affects a Home Purchase
- Lenders may deny credit. Lenders look for consumers with high credit scores to offer loans. They often offer their best interest rates to the lenders with the best payment history and credit scores. Mortgage lenders are more likely to deny consumers with low credit scores due to the high amount of the loan.
- Lenders look at payment history. Lenders weigh the credit score and credit history as the most important factors in their decision. Even with a good credit score, payment history is a huge factor. Lenders want to know that consumers will be responsible in the future when it comes time to repay their debts.
- Consumers may receive a high interest rate. A high interest rate is probably the biggest way that lenders can deal with a high interest rate. For example, if a consumer purchases a home for $120,000, they can end up paying triple the price for the home with a 30-year mortgage.
- Consumers may have to buy points. When consumers qualify for a higher interest rate because of their credit score, they have the option to buy points to lower the current interest rate. It can be very expensive for consumers.
Ways to Improve Credit Score
- Make a home the first big purchase. Many consumers have a great amount of credit card debt and a new car on their credit report at the time they apply for credit to purchase a home. Lenders take into consideration each item on the credit report, and these items can bring a credit score down tremendously.
- Pay credit cards down before buying a home. Credit cards can bring a credit score down very low—especially when they are maxed out or at more than 30% of the available credit limit. Too much credit card debt can cost consumers the opportunity to receive the best interest rate.
- Check credit before making the purchase. Most credit reports contain errors that can lower the credit score on credit reports. Lenders must take into consideration each item on a credit report—even if it does not belong to the consumer in reality.
- Make sure that no late payments are on credit reports. Even one late payment can lower a credit score. Late payments send the message to lenders that consumers are not responsible with their money and that they may not repay the loan in which they are applying for at the moment.
A credit score can make the difference between receiving a loan and being denied credit. Consumers must know what is on their credit before they try to buy a home. Lenders have strict requirements for buying a home that they will not change for consumers.