While you can still obtain a mortgage with a slightly lower credit rate it will cost you in the long run. Below is why good credit counts and how bad credit costs you.
How much will it really cost?
Lending Tree has found that even if your credit score is just a few points lower you could end up paying an additional $10,000 over the life of your loan. It might not seem like a big deal since it is split up over the course of 30 years. But think about what you could do with an additional $10,000.
Keep in mind that this is the difference if you are just a few points shy of excellent credit. So think of what happens when you have a credit score at the bottom of the barrel for where lenders will still write loans.
Why lenders care about your credit score
Your credit score is how lenders are able to determine if you are a safe bet to loan money to. If you have low debt-to-income ratios, make your payments on time, and show that you are responsible with how you handle your finances, your credit score will be higher. This good credit score shows lenders that they can trust you with their funds.
However, if you have high amounts of debt and default on your loans, lenders are going to see that there is a good chance you will not repay them what you owe them. That’s why the lower your credit score is the higher the interest rate is that they will charge. The lenders are trying to cover their bases.
Your credit score impacts more than just your interest rate
Your credit score also plays a role in the size of the down payment that you are required to make. The more favorable terms are reserved for those that have the highest credit score. If you want to take advantage of these benefits, work on getting your credit score as high as possible before you get pre-approved for a loan.
How to improve your credit score
If your score isn’t where you want it to be, focus on improving it before you are ready to buy. Start by checking your credit report. This will give you a detailed look at why your score is as low as it is. Look for any errors that are being reported and take the time to correct them.
Then start working on getting any past due payments current while making every payment on time. Look for ways to start paying extra down on your principal to reduce the amount of debt that you have.
This also shows lenders that you have the ability to pay more than just the minimum.
A low credit score really can cost you when it comes time to buy a home. It can cost you not being approved for your mortgage or cost you in interest if you do secure a loan. If you get a mortgage with a higher rate consider refinancing with a lower interest rate once your credit score has improved.