The All Important Credit Score
The interest rate you'll pay for the money you borrow, (i.e. a home loan) will be driven, largely, by your FICO scores on your credit report that lenders pull.
A 620 credit score is in most cases the lowest score that lenders will accept to offer conventional home loans. Otherwise, borrowers need to accept a government backed loan, such as FHA which offers low rates too.
Nearly all lenders have hard and fast rules regarding who they offer the best terms to and those rules 99 times out of 100 emphasize that your credit score plays a major role. Currently, some of the best loan products are offered to borrowers with a score of 720 or higher. If your score is 714 those six points could mean you need to pay thousands of dollars more in interest for the life of the loan and possibly a higher down payment.
On a $500,000 30-year fixed-rate mortgage, that difference could cost you more than $18,780 in interest charges in the first five years, assuming a 4.00 percent interest rate with a 725 credit score and a 4.75 percent rate for borrowers who have a 714 score. If your score is lower than 680, the interest increases even more, and so may the down payment. This may eat into those upgrades you make on the home.
As illustrated above, a lot of lenders engage in tiered pricing, with interest rates going up as credit scores decrease. However, not all lenders are the same. Some choose their own "cut-off thresholds". Lender A may increase the interest rate if someone's FICO score is under 700, while Lender B offers the same interest rates until a borrower's score is under 680. So if you apply with just one lender (or local bank), and that lender's cut-off area for credit scores is 720 or 700, improving your credit score from 692 to 701, or 720 can be very important.
This highlights the significance of doing all you can to boost your score and also the importance of shopping for a mortgage. Fortunately, a mortgage broker has the ability to pick and choose among an array of lenders, where lender will not be as inflexible and have lower thresholds. It is recommended that any home buyer find a lender that offers the best rate and terms for a specific credit score.
Keys to a Higher Credit Score
1. Pay your Bills on time. Always !!
2. Keep Credit Card Balances Low. Ideally less than 30-percent.
3. Don't Open any New Credit if You Don't Need it.
Credit Boosting No-Nos
1. Closing unused accounts. Closing credit cards you rarely use without paying down their debt may increase your utilization ratio, which is your total debt divided by your total available credit limits.
2. Don't have one credit account with a balance of 50% or more of its credit limit and the rest at zero balance. Try to spread the usage on your accounts to 10 to 30 percent, less is ideal.