“A mortgage is a mirror reflecting our relationship with money. It is a reflection of our attitude toward ourselves, our family, and our future.”- Suze Orman
So, you have plans to buy a house. Now, or in the future. If you have only started to save for your down payment, you might think that nothing needs to be done for now. And the day comes, only to realize that a few simple things done in the waiting years could have saved you thousands of dollars in interest. You will be left with a tough choice. You can either wait more for a better deal or get the mortgage at an exorbitant interest rate. Nobody wants to be there. Definitely not you.
All the hurdles you face during your mortgage application arises from one simple fact. Your lender expects you to pay the debt back. With interest. And your credit score is a mere quantification of your ability and willingness to do the same.
Naturally, most lenders have a minimum credit score requirement for mortgages. If your score falls below this threshold, you don’t get a loan. You have to wait till you have the right numbers. We will talk about that in a moment. A credit score of 630 and above is characterized as Fair Credit. Means, you will get a mortgage, at a more or less high interest rate. But you will get one. If you have a score of 760+, you will get seriously good deals. You can get up to 1.5% savings on interest rates with a credit score like that. To make things more concrete, for a $200,000 mortgage, you will get a neat $50,000 saving over a period of 30 years. That’s a solid fifty grand extra on your retirement account.
With a great credit score, you also have the option to put less money down and buy the house with credit. This can help you buy the house early. Or you can also get approved for a higher loan amount. Because, once again, if you are more likely to return the money, the lender gives you more of it. Simple.
Enough with the Why’s. Let’s get to the How’s now. We will kick things off by telling the hard truth. You cannot game your way into an exceptional credit score. The system is in place for a reason. But there is good news too. There are sure-shot techniques that can give a boost to your credit score. Ridiculously big boosts if your present credit score is below 630. But before we dive into the pro tips, let’s set the basics right.
So, you have plans to buy a house. Now, or in the future. If you have only started to save for your down payment, you might think that nothing needs to be done for now. And the day comes, only to realize that a few simple things done in the waiting years could have saved you thousands of dollars in interest. You will be left with a tough choice. You can either wait more for a better deal or get the mortgage at an exorbitant interest rate. Nobody wants to be there. Definitely not you.
All the hurdles you face during your mortgage application arises from one simple fact. Your lender expects you to pay the debt back. With interest. And your credit score is a mere quantification of your ability and willingness to do the same.
Naturally, most lenders have a minimum credit score requirement for mortgages. If your score falls below this threshold, you don’t get a loan. You have to wait till you have the right numbers. We will talk about that in a moment. A credit score of 630 and above is characterized as Fair Credit. Means, you will get a mortgage, at a more or less high interest rate. But you will get one. If you have a score of 760+, you will get seriously good deals. You can get up to 1.5% savings on interest rates with a credit score like that. To make things more concrete, for a $200,000 mortgage, you will get a neat $50,000 saving over a period of 30 years. That’s a solid fifty grand extra on your retirement account.
With a great credit score, you also have the option to put less money down and buy the house with credit. This can help you buy the house early. Or you can also get approved for a higher loan amount. Because, once again, if you are more likely to return the money, the lender gives you more of it. Simple.
Enough with the Why’s. Let’s get to the How’s now. We will kick things off by telling the hard truth. You cannot game your way into an exceptional credit score. The system is in place for a reason. But there is good news too. There are sure-shot techniques that can give a boost to your credit score. Ridiculously big boosts if your present credit score is below 630. But before we dive into the pro tips, let’s set the basics right.
1. Borrow Below Your Means
Keep your credit card spending capped ideally at or below 30% of your available limit. This is just common sense. If you already owe all the money you could get your hands on, getting more credit would be hard. You have a $20,000 credit card limit doesn’t mean you should borrow it all. Your credit utilization ratio contributes, coincidentally, 30% of your credit score. There is a way you can get around this. We will get to it in a moment.
2. Pay on Time
Start making your payments on time. No big surprise here. Because 35% of your credit score stems from your payment history. And, rightly so. If you are already doing it, congratulations. If you go out from here learning only one thing, this should be it. It’s time to move to the pro tips, now.
3. Play it Long
When your credit history improves over time, you will qualify for credit cards with larger limits and better offers. But keeping the old ones open will give you a longer credit history. With a decent 15% weightage on the credit score it’s the first thing you should take care of if your basics are already in place.
4. Pay off the Cards
If there is such a thing as low-quality credit, credit card loans would qualify for it. They are short-term, come with heavy interest rates, and naturally, the credit bureaus are not fond of them. When you have the means, first pay them off before anything else.
5. Close Unsecured loans
Once you clear your credit card debt, next in line should be the unsecured loans including the personal loans or student debt if any. Since they don’t come with a guaranteed payback it will eat away a part of your credit score.
6. Diversify
Owing to risk management, credit bureaus like your loans to be distributed in different industries. First, close the loans in the industry where you have other loans. Credit mix has a good 10% weightage in credit scores.
7. Go for a large limit
You might want to keep the credit card spending the same. But you also would want to maintain a healthy credit utilization ratio. You can do this by simply getting a larger credit limit. All you have to do is apply for one.
Now that you have all you need to know about building a healthy credit score, start saving some real money on your mortgage. But we wouldn’t recommend you to take the game too far. In the meantime you wait for the best credit score, the policy rates can go up and offset all its potential benefits. We are a leading residential mortgage service provider in the United States.
