Credit plays a very important role when it comes to purchasing a home. Your credit score demonstrates your history of debt payments to entities that loan you money. There are three credit bureaus (Experian, TransUnion, and Equifax), and each bureau scores credit differently. Their scoring methods assign varying weight to each criterion. When credit scores are pulled, mortgage lenders typically use the middle score number. If there are two or more borrowers, the lowest middle score number is used.
Credit scores directly affect the available interest rate and mortgage insurance premium on a home loan. If a homebuyer does not have good credit, lenders will consider the loan risky and may decline the loan or require a higher down payment.
You should talk with a lender about your credit score as you start home shopping. If your score needs to be improved before purchasing a home, we offer a free wayfinding tool that suggests methods to possibly increase your credit score in a matter of 3-5 business days. Qualifying for a mortgage may become possible after implementing the suggestions.
Credit cards help establish consumer’s credit, but if there are delinquent payments, the score can easily drop 100 points or more and remain on their credit reports for seven years! Ouch.
How would this late payment affect your mortgage and monthly payment?
Let’s look at this scenario:
- You apply for a mortgage loan to purchase a home for $500K
- Your current credit score is 760, and you make a 10% down payment
- Assuming market rates over the last month, your interest rate is 5.875% (6.089 APR)
- Your monthly principal and interest payment = $2662
- Your mortgage insurance premium is at .18% = $67.50/month
If you accidentally were late on a credit card payment, your credit score dropped by 80 points to 680.
- Assuming the same market rates, your current interest rate is 6.5% (6.724% APR).
- Your monthly principal and interest payment = $2844.
- Your mortgage insurance premium is now at (.43%) = $161.25/ month
Bottom line: One late payment caused you to have a higher payment of $275 a month. Ouch again.
It is crucial to understand how your credit score impacts your fixed monthly mortgage payments. We are here to explain credit scoring and put you in the best position to purchase a home with affordable monthly payments.
I am giving a “Credit 101” presentation on October 5 at our Planet Boulder office.
Please reach out to me if you’d like more information.
Planet Boulder Loan Consultants are available to analyze your credit related to loan eligibility and can share their Credit 101 presentation.