For most people, the purchase of a home is the largest financial transaction that they will ever incur. Due to this, first-time home buyers can feel overwhelmed with such a monumental task. Your Credit Score will play a major factor in this process. Because of this, we will focus on the importance of Credit Score and what steps can be taken to raise it in this blog.
Know your Credit Score
Chances are that with a first time purchase, a homeowner will have to take out a loan. Therefore, it is imperative to know your credit score when going into the negotiation of a contract because it will affect many factors including the interest rate on your loan. There are three major credit reporting agencies in the U.S. These are TransUnioin, Equifax, and Experian. Usually, creditors will run your score through all three of these agencies and go with a median score between all three.
Credit Score Range
Though the credit score varies from 350-850, qualifications for loans don’t start until a person is in the 500 range. Below is the categorization of credit score.
- 500-579 Bad Credit Score
- 580-619 Poor Credit Score
- 620-679 Fair Credit Score
- 680-739 Average Credit Score
- 740 and higher Great Credit Score
As mentioned above, your credit score will affect many factors on your purchase of a home. For instance, did you know if you have a 580 credit score you will only need 3.5% downpayment for a FHA (Federal Housing Administration) loan. However, if it is 500-579 you will need at least a 10% downpayment to qualify! Your Credit Score will affect your interest rate as well. The poorer the Credit Score the higher the interest rate and monthly payment will be, the higher, the opposite.
- 579 and lower-if you are approved for a mortgage with this low of a score you will have an interest rate 2% higher than the current rate.
- 580-619-you can expect an interest rate 1% higher than the current rate.
- 620-679-you can expect an interest rate .5% higher than someone with great credit.
- 680-739-is the rate most homebuyers are at. Your rate will not be affected much at all in this range.
- 740 and higher-you will be offered the best mortgage rates that companies have to offer.
While 1-2% may not seem like much, it could result in 10’s of thousands of dollars over the long term. For instance, if you finance your house for a mere 3.5% at 30 years, you will end up paying for the property almost twice with interest included! Imagine if you have a poor credit score. It could be 3-4 times the initial cost of the house! This is why your credit score is a major factor in the amount of money you will need and can save when it comes to the purchase of a home! In the next blog, we will discuss ways that you can bring your credit score up to par if you have bad credit.