The home of your dreams depends on a few different factors. One of the keys to the keys you're after is a high credit score. Make sure you know how to build good credit and improve your current score to lock in a better interest rate and loan product.
Understanding credit score
A credit score serves as a measurement of how well you pay back your debts. Lenders can then use this information to determine whether you are a risky borrower. The less confidence lenders have in your ability to pay back loans, the higher your interest rate will be, the smaller your loan will be and you will also be more likely to face rejection when you apply.
It's important to note there are different ways to determine credit scores, according to U.S. News & World Report. For example, FICO is one of the most popular ways to determine a credit score. In addition, there are other places your score might be different.
"If you get your FICO score from one lender, that very likely won't be the same score that you would get from another lender, even though they're using the FICO model," Maxine Sweet, Experian's vice president, told U.S. News & World Report.
Why a credit score?
Your credit score allows lenders to understand your financial stability in a unique way. "It simply lays out the facts of your history," said Sweet. It's an easy way to measure your dependability when it comes to paying back debts. Unless you're of the House Lannister, your credit history is what lenders will weigh most heavily.
While the number is important, consider where your score falls on a scale first. It's valuable to know if you have good or poor credit before applying for a mortgage.
Use rejection to learn more
If you wind up facing rejection when you apply for a home loan, it can actually be to your advantage. You will be given information regarding the factors which negatively impacted you and ultimately led to the rejection.
"Those factors will tell you what behavior you will need to change to change your credit history," said Sweet.
Make sure you first work on these factors before applying for a home loan again. This will take time and patience, but the direction you will gain is invaluable.
Your credit history's impact on a home loan
According to U.S. News & World Report, your score can determine more than just whether you are approved for a home loan. It can also impact whether you pay a higher or lower interest rate. This is another reason why it's important to attempt to improve your credit score as much as possible. By doing this, you will improve your chances of saving more money over the course of the life of the loan.
Determining excellent, good and poor credit
Before applying for a home loan, a responsible individual should make sure they know exactly what his or her credit score is. However, without knowing what determines a great credit score it's difficult to decide what your course of action should be.
FICO is the most common type of credit scoring algorithm. These scores range from 300 to 850, according to Nerd Wallet. A poor credit score is considered anything below 629. Average and good credit scores fall somewhere between 630 and 719.
To have what is considered excellent credit, work toward a score of 720 or higher.
Improve your score even if it's good
If you are unsure whether improving your credit score will make much of a difference if you have a relatively good score, consider the profound impact it will have on savings. In fact, U.S. News & World Report indicated there is nearly a $50,000 difference when paying for the interest of a low and high credit score.
For this reason, putting your best foot forward when applying for a home loan should be a top priority no matter what your current score is.
Make sure you have credit
Some individuals may think not having a credit history is a good thing. Someone without this has demonstrated they do not need to borrow money, right? Unfortunately, if you do not have a credit history, lenders cannot determine whether you are a risky borrower who does not typically repay a debt. Without a credit history, you might wind up facing rejection, according to Trulia, an online real estate company.
So, it's important to start building credit responsibly to improve your chances of loan approval as well as locking in a low interest rate.
One of the first steps of solidifying the home of your dreams is ensuring you properly understand the importance of a credit score and how it can impact your home loan application process.