In order to purchase a new home, unless you’re a cash buyer, you will need to secure financing. The most common type of financing is a mortgage loan from a bank. But before you can get approved for a loan, the lender will want to know as much as possible about your financial situation and security, and will review everything from your current income to your job security to your existing debts and more. If the bank is willing to grant you a home loan, one thing that will affect your interest rate is your credit score.In order to purchase a new home, unless you’re a cash buyer, you will need to secure financing. The most common type of financing is a mortgage loan from a bank. But before you can get approved for a loan, the lender will want to know as much as possible about your financial situation and security, and will review everything from your current income to your job security to your existing debts and more. If the bank is willing to grant you a home loan, one thing that will affect your interest rate is your credit score.
What’s a Credit Score?
As explained by BankRate.com, your credit score is a three-digit number that is based on your credit report. A higher credit score number implies better financial health, and that a lender will assume less risk lending to you. A lower credit score, on the other hand, typically means that something has happened in your financial past that negatively affects your credit, and therefore a lender will take on more risk by lending to you. Failing to pay your bills on time, closing lines of credit, having too much debt, or not having a good mix of new and old credit can all hurt your credit score.
What’s the Average Credit Score in the U.S.?
FICO scores – the type of credit score that most financial institutions in the U.S. rely on to make lending decisions – range from 300 to 850. A recent article in U.S. News & World Report asserts that the average American credit score has risen to an all time high: 700. To be sure, 700 is considered a good, but not an excellent, credit score. In part, the increase in the average credit score has been bolstered by consumers’ trust in the market post the housing crash of 2008.
How Does a Credit Score Affect an Interest Rate? Why?
A consumer’s credit has the potential to have a significant effect on their interest rate, whether seeking a mortgage or applying for a large purchase like a car. Remember, a lower credit score means that a consumer poses a greater risk to the lender of not making payment on his or her loan/credit card on time or in full. On the other hand, a higher credit score reassures the lender that the consumer has a track record of making payments when requested, implying that they are more likely to make their mortgage payments on time. The higher risk you pose to a lender, typically, the higher your interest rate will be. If your credit score is especially low, you may even be denied a loan altogether. Generally speaking, the higher credit score you have, the lower your interest rate will be.
Your interest rate is a very important factor in your decision to secure a mortgage and work with a lender. As you are preparing to build or buy a new home, work on establishing strong credit history by making payments on time and keeping your debt to income ratio low. And if you haven’t ever taken out a loan on something like schooling, a car or another large purchase, then you may have somewhat of a difficult time convincing a lender that you’re able to pay back larger loans on-time.
How to Improve Your Credit Score
There are a number of things that you can do to improve your credit score, but remember that a credit score takes time to improve. But with consistent effort and diligence, your credit score will improve over time if you:
- Keep your credit card balance relatively low, and rarely more than 30 percent of the total credit you have available;
- Pay your credit card balance in full and on time every month;
- Aren’t afraid of having multiple sources of debt – remember, the types and amount of accounts you have open matter;
- Are patient – if you have a bad mark on your record, it can take years to go away – do what you can in the interim, but don’t obsess about something you cannot control;
- Pay all your bills, not just credit card bills. For example, an unpaid healthcare bill can affect your credit too.
Getting Approved for a Mortgage for Your New Hayden Home
When you are applying for a loan for your dream home, your credit score isn’t the only thing that the lender will weigh before making a decision whether to fund your purchase, and if so, what your interest rate should be. Banks also consider your employment, your income and total assets.. Remember, the larger down payment you have, the smaller loan amount you will need, which may help if your credit score isn’t quite where you want it to be.
At Hayden Homes, we provide convenient financing options to make the process of securing a loan as straightforward as possible in order to buy a new home in Oregon, Idaho or Washington. To learn more, get in touch with us today.