Nearly 40% of American’s make New Year’s resolutions. Of those making resolutions, 21% included buying a home on their list of 2020 resolutions.
Before you set out to make your dream of homeownership a reality, there are a number of questions to ask yourself: Where should I buy my home? What style of home do I want? How much home can I afford? What’s my credit score?
While it’s great to know where you want to live and the style of home you want, the only way you’ll be able to achieve homeownership is knowing your credit score and how it can affect the home buying process. That three-digit number is one of the most important factors when applying for a mortgage.
Before you start your home search, it’s a good idea to pull your credit reports from the three major credit agencies (Equifax, Experian, and Transunion). As a consumer, you are entitled to check your report yearly without adversely affecting your credit. (You can check your scores here). If you notice any issues or need to raise your credit score, you’ll be able to address it prior to applying for a mortgage.
A majority of mortgage lenders use the FICO (Fair Issac Corp) model to determine your credit score. Credit-worthiness is based on a number between 300 -850 points, with a higher score equating to less financial risk. An exceptional credit score is 800, 740-799 very good, 670-739 good, 580-669 fair, and 579 and lower poor. Without a high credit score, you’ll end up with a higher interest rate and will end up paying more throughout the life of the loan. A lower score makes it less likely to qualify for an affordable rate or even can cause your application to be rejected by lenders.
Believe it or not, even a small change in your credit score can make a big difference. For example, you’ve applied for a mortgage and been approved for a 30-year fixed loan of $200,000. If your FICO score is an exceptional 810, your APR (annual percentage rate) would be 3.4% with a monthly payment of $890, resulting in $119,000 of interest paid throughout the life of the loan. However, if your FICO score changed to 750, your APR would be 3.6%, monthly payment of $910, and total interest paid $129,000. And if your FICO was 650, your APR would be 4.5%, monthly payment of $1000 and total interest paid $163,000. That’s $44,000 more paid in interest for only a 150 difference in score and 1% difference in APR, so it’s in your best interest to make sure your score is as high as it can possibly be.
If you’re unhappy with your current credit score, consider putting your home search on hold while you work to improve your credit score and your mortgage loan options. Then follow these tips to help boost your score:
- Pull your credit report, review it, and correct any errors. As previously stated, you are entitled to a free credit report from the three major agencies annually. File a dispute with both the reporting agency and the creditor if you discover inaccuracies.
- Pay down credit card balances. When applying for a loan, lenders prefer that your credit utilization is 30% or less. If your utilization is higher, it negatively affects your credit score. To determine your debt to usage ratio, divide your total debt into your available credit. For example, if you have $10,000 in available credit and have $4,000 in debt, your ratio is 40%.
- Pay bills on time. Missing a payment here and there may not seem like much, but it can add up. Payment history accounts for 35% of your total FICO score, so on-time payments are crucial.
- Resist the urge to open new accounts. Each new request for credit can lower your score. In the case of credit accounts, less is more.
Improving and maintaining your credit score takes discipline, time, and effort. If you’re willing to do what it takes to raise your score, you’ll be able to achieve your dream of homeownership with the best possible mortgage rate and loan options.
Pacor Mortgage is your best resource when it comes to mortgage financing. For more than 33 years, our expert real estate team has helped homeowners like you navigate the challenging and always changing real estate market. We would be honored to help get you in the home of your dreams and stand out from the competition. Visit our website to create your account and start closing your loan in as little as 15 minutes.
2020 Pacor Mortgage Corp.
Loan officer NMLS #: 208731. Loan inquiries and applications in states where I am not licensed will be referred to a Pacor Loan Officer who is licensed in the property state. Pacor Mortgage Corp is located at 14930 Cicero Ave, Oak Forest, IL 60452, Phone 773-881-7744 (Unique Identifier #120945). Pacor Mortgage Corp is an equal housing lender and is licensed by the Secretary of State under the Illinois Residential Mortgage Lending Act and is assigned Illinois Residential Mortgage License MB.0000892. Pacor Mortgage Corp branches operate with the following licenses and is assigned Illinois Residential Mortgage License MB.0000892-001, with a Wisconsin License # 260345BA, Palos Heights NMLS 261297 and is assigned Illinois Residential Mortgage License MB.0000892-008, Colorado, Licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act, California license # 41DBO-67516, Florida MLD1075, Indiana DFI 13177, Maryland 23528, Michigan FL0828, Michigan SR1130, Minnesota MN-MO-120945, North Carolina L-184546, Ohio RM.804151.000, Pennsylvania 43855, South Carolina, MLS – 120945, Wisconsin 120945BA, Kalamazoo, MI NMLS 120945 also DBA Lake Pacor Home Mortgage. This is not an offer for an extension of credit, a rate lock or a commitment to lend. All loans must satisfy company underwriting guidelines and any investor overlays. Any of the advertised products may be discontinued at any time. Information and pricing are subject to change at any time and without notice. Loans are being committed and closed at expressed rates although these rates change and may not be available at time of your lock in, commitment and / or closing. Pacor Mortgage Corp is not affiliated with your current lender, nor is it an agency or extension of the Federal Government, Fannie Mae, Freddie Mac or HUD.