When people are getting into the housing market for the first time, they likely have a pretty good idea of the ways in which certain aspects of their finances impact their ability to get approval on a mortgage application. However, they may not fully understand how much their credit scores not only affect the up-or-down decision on whether they get approved, but also dictate how affordable their mortgage deals end up being over the lives of those loans.
Simply put, a credit score is a numerical way for lenders to assess how likely a person is to pay back a loan amount, according to NerdWallet. Those who have good histories of keeping debts down, paying their bills on time and generally managing credit responsibly will have higher scores. In a lot of cases, it's wise for people to only seek a mortgage if their score is at least 700, which is the level many lenders consider to be the floor of "good" credit.
"If somebody has a high credit score, what that shows us is that they've been good on meeting their obligations, whether it be credit cards, car loans or other home loans in the past," Brian Hoovler, a loan production partner with a lender in San Francisco, told the site. "It means we're more likely to want to give you a loan, because we know you're going to pay us back."
A look at the impact
Of course, even having good credit might not be enough to get the best possible home loan deal, according to Bankrate. Generally speaking, the higher an applicant's credit score is, the lower their borrowing costs – usually through the interest rates they pay on their loan balances – will be. For instance, a person with a credit score of, say, 710, might be given a mortgage rate of 4.5 percent, whereas someone whose score is north of 750 would potentially be able to get rates as low as 4 percent.
And while that might not seem like a sizable disparity, over the course of a 30-year home loan, the savings can really add up – to tens of thousands of dollars over the life of that loan, the report said.
The reason lenders are willing to cut borrowers with stronger credit scores those kinds of deals is simple: When they view people as being less risky investments, they don't have as much of a financial incentive to reduce their risk with higher borrowing costs.
It's important for people to keep in mind that their credit scores can range anywhere from 300 to 850, but lenders mostly start loosening the purse strings for would-be borrowers in the high 600s at the very least, according to CNBC. However, to ensure they are both approved quickly and easily and gain access to the best possible rates, mortgage applicants should strive to push their scores north of 750.
Working with a real estate agent or finance professional will help first-time buyers get a better understanding of what they need to do to find reasonable mortgage deals based on their unique financial situations.
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