Numbers are thrown at us each day and we seldom remember all of them. What’s your credit score? Do you know? If not, you may want to check it, especially if you are thinking about buying a home next year. One of the biggest mistakes home buyers make is that they do not consider their credit early enough, which means their numbers are so low when they apply that they either are unable to get the loan, or they have to pay much more to borrow the same amount of money.
This isn’t a great deal for buyers, especially when you add to it the fact that home prices and interest rates are high. So, if you are going to borrow money, wouldn’t it make sense to build up your credit, especially when it has such an impact? Of course, it makes sense to do that, but before you focus on how to fix your numbers, you need to understand why they are so important and how they can be influenced.
Credit Will Lower Or Raise What You Pay To Borrow
When you apply for a mortgage, you are telling the lender that you want to borrow money to buy a home. The lender will then examine your information to determine if you qualify and how much you should pay each month based on what you are borrowing, the length of the loan as well as things like interest rates, what you are putting down and your credit score. If you borrow $300,000 to buy a home and have a good credit score, your payments may be $1,900 a month. However, if you were to borrow the same amount with a poor score, your monthly payment may go up to $2,200. While that doesn’t seem like enough to keep you from buying, it is enough to potentially cost you a chance of buying.
We tend to focus on the sales price more than the actual cost to pay off the loan. That’s actually a mistake and in many cases, it’s why people are unable to get the property they want. What’s the difference between buying a house with a great score and a great income-to-debt ratio versus buying without those things? The answer is that you may not be able to buy and there are thousands of people who have missed out on getting their home because of their credit score alone.
Credit Impacts Your Income-To-Debt Ratio
Your income-to-debt ratio is based on what you owe in debt, combined with what you are going to have to pay for your mortgage and comparing it to what you make each month. For example, if you earn $5,000 a month and you have to pay $1,250 a month for your credit card, car and that television you’re financing, you have a ratio of 25%. That’s great but what happens when you add a mortgage payment of $2,000 a month to that number? Now your debt has passed 50% of your income and while that’s manageable for you, that may not work for the lender.
Because your income-to-debt ratio needs to be under 43% after the mortgage is factored in, you have two options to improve your numbers, get the amount you currently owe down or work on getting that mortgage payment down, or both.
If you can tackle both options then that’s great. Getting your credit score up, even a bit, can make a huge impact and can cut your monthly payment down hundreds of dollars. Combine that with having paid off that card or even the car, and suddenly your ratio is well under 40%, giving you the option to borrow more even if you wanted to.
You Can Lose Thousands Each Year
Your score will not always impact whether or not you can borrow money. Instead, it will usually have the biggest impact on what you have to pay for borrowing that money which is where people are usually caught off guard. Paying off debt takes time and patience. However, if you are able to cut the amount you have to pay towards that debt, then you can literally save thousands of dollars. For example, if your credit score can help you to save $200 a month, that’s over $2,000 a year in savings. However, the hidden advantage to that is that you can use that savings to get ahead of your debt, paying it off quicker and lowering your ratio even more.
Improving your score can also give you options if you’ve already purchased a home. Those who are currently buying houses at higher interest rates, especially with a lower score, know that they are paying more per month. However, once rates drop, if your score is improved, you have the opportunity to refinance your entire loan. Refinancing with a higher credit score and a lower interest rate can stack up your savings and allow you to pay off your mortgage earlier or just make your monthly payments lower.
How To Fix Your Scores
Fixing your credit score will take some time. There are online programs that offer quick results and some of them actually work. The key is that they only work enough to make an impact, not a complete fix. For example, a company may be able to raise your numbers by 100 points, but that may not be enough to get the loan you want. That’s why it’s recommended that you incorporate your own strategies for improving your scores along with any professional assistance you may have.
While it does take time to rebuild your score, your lenders will be able to see the improvements when you apply. They will see that you’ve lowered your debt and show a real effort in paying your bills on time, paying more towards the principal, and more. Do not apply for financing until you get the house, because even applying to buy a couch can cost you the loan. Be patient and work with your lender to ensure that you are on the same page and doing whatever you can to lower those costs.
