Not all of us can afford a house or real estate property with just our savings. Thus, most rely on mortgage loans offered by banks. However, the amount they are willing to lend you depend on many factors. One of which is having a good credit score. In this article, we’ll help you improve your credit score and how to utilize it.
Simply put, a credit score is a financial calculation based on many factors such as payment track record (35%), credit history (15%), credit utilization (30%), new credit (10%), and types of credit (10%). This is determined by renowned credit-reporting agencies in your country. For example, in Canada, there are two credit-reporting agencies that deliver credit reports on an annual basis or as requested.
It’s best to note here that the credit score is only useful when applying for a mortgage loan. Of course, there’s no set minimum credit score when you’re buying a property with your own money. Also, the credit scores change annually depending on your financial activity.
What’s the best credit score range to avail the lowest mortgage rate the lender can give you? In general, credit scores range from 300 to 850. High scores guarantee the lowest rates while the lower scores would be subject to ample scrutiny and high-interest rates. Lenders analyze these numbers and determine the rate and the amount of money they’re willing to lend you.
The commonly used credit score scale is the Fair Isaac Corp. or FICO scale. Below is the overview of this credit score scale:
For credit scores under 650, you will be having a difficult time in regards to the approval of your mortgage loan because lenders will think that you have a bad payment history. In case that your mortgage is approved, you may have to pay the highest interest rates.
But for first-time buyers, the Federal Housing Administration is willing to offer those who have a credit score of 580 and up with just a 3.5% down payment of the house price. Those who have 500 to 579 will have to pay at least 10% down payment of the house price though.
One of the mighty differences between the highest credit score range and the lowest credit score range is the monthly interest rate. For example, the median rate for FICO scores 760 to 850 is 3.49% while the 620 to 639 has a 5.07%. These are the interest rates for a 30-year mortgage for $200,000 paid at a monthly fixed rate. As could be seen, you’ll be paying more than $1,080 for having a credit score as compared to close to $900-monthly amortization due to having an exceptional credit score. The difference of the two from beginning to end of the loan can reach $67,000! This value is only for the interest.
Building a good credit normally takes years as it’s a long process. You can always start small such as paying your debts on time and dwindling your credit utilization ratio to 35% or lesser than that. For the latter, this is about the ratio between the debt you have and the available credit.
Any updates to your credit score won’t reflect immediately. Give it at least one to two months to view your updated credit score. What we just shared are some of the ways to improve your credit score to secure the lowest rates for a mortgage, but remember that they will impact your credibility in the long term.