If you’re interested in purchasing a home, the interest rate you get on your mortgage can make a huge difference in how much you’ll pay over the life of your loan. There are several key factors that affect your interest rate, like the location of your home, the health of the housing market and the economy in general, how much of a down payment you make, and your personal credit score. In this week’s blog, we’ll explore how credit affects mortgage rates and unpack some ways you can start to build your credit to get a better rate and potentially save thousands. If you have more questions, the lending professionals at Family First Mortgage are here to help. We work with top national lenders to offer local clients in Lafayette, LA, find great rates and terms, and we’d love to help you find financing.
Better Credit = More Security for Lenders
Coupled with other markers like your debt-to-income ratio (DTI), your credit score is a way for lenders to evaluate how likely you are to make your loan payments on time. Credit scores are calculated based on a few different categories that rate your financial health. These are your payment history, the balance-to-limit ratio on your cards, the length of your credit history, recent activity on your credit cards, and how much overall debt you carry. If your credit score is good, this offers some insurance to lenders that you have a history of good financial health, at least recently, and that you’re likely to pay back your loan, and on time. Lenders don’t want to fund borrowers who are going to default, because recovering their losses is an arduous process that usually leaves them at a loss.
What’s a Good Credit Score?
FICO scores are a commonly used type of credit scores that credit bureaus report. FICO sores range from 300-850. Different scores have different rating classes, ranging from very poor to exceptional. A score of 670 or higher is typically considered a “good” score, while most conventional loans require at least a 700 credit score for approval. The higher your score, the incrementally lower the interest rates available to you. Even a change of just 20 points in your score could bump you into a higher credit category and make a huge difference in what you pay.
Improving Your Credit for a Better Rate
There are ways that you can build your credit score that don’t take a lot of effort on your part. They include:
- Pay off your loans with the highest interest rates, one at a time. Rather than making small payments on several different debts, you can focus larger payments toward any debt that has the highest rates now. It’s important that you still make at least minimum payments on any other debts, however, and make them on time.
- Keep an eye on your balances. While rare, sometimes even slight errors on your credit report can greatly affect your score. If you regularly check in your credit score and your debt balances, you can catch any problems, such as identity theft or fraudulent charges, before they create a problem.
- Don’t close accounts. Even if you pay off one of your credit card balances, you may want to keep the account open, even though you aren’t using it anymore. The higher your credit limit – how much you could potentially borrow on your cards – the better, though it’s important that you don’t continue to rack up debt on these cards once they’re paid off.
We’re Here to Help
If you’d like to learn more about improving your credit score and other ways to secure the best interest rate for your home loan, contact Family First Mortgage. We love helping families in Lafayette look at conventional and nonconventional lending solutions to find great rates to buy homes they love.