The better your credit score, the better interest rate you can get when it comes to mortgages. In fact, the first thing a mortgage lender will look at is your credit score. This is now more important than ever in today’s housing market.
A High Credit Score Means you Pay your Debts on Time
A mortgage lender wants to know that you will repay your money on time. Those who pay back slowly or do not pay back at all have lower credit scores. Lenders do not want to risk those who pay back slowly.
This doesn’t mean that they will not offer you a loan, but it will be at a much higher rate to compensate for the risk. For example, the difference between a 4% rate and a 5% rate on a 100,000 30-year loan is around $59 per month, over the age of the loan that will cost $21,240!
A High Credit Score Means you Have a Good Mix of Credit
A good score also depends on your credit mix. You want to be able to prove that you can handle a variety of debt such as credit card and no installment debt. A mix of both revolving and installment debt shows that you can handle both types of debt. Showing that you can handle both can help you get a lower interest rate.
Why Lenders Base your Interest Rate on your Credit Score
Mortgage lenders will tell you that your credit score is the number one factor in determining your risk of default. If you are approved and have less than stellar credit, you will be charged a much higher interest rate. The lenders will make more money off of you in the event you do default.
Increase your Mortgage Credit Score Before Applying for a Mortgage
If you do have a lower score, then think about improving it before applying for a mortgage. Get your debt under control, have a stable job, and have some money saved before you apply for your mortgage. Improving your credit score is the key to a lower interest rate and with a few simple steps, you can accomplish this.