Good credit is an essential part of being approved for your mortgage and has multiple effects. If you have good credit, then the chances are high that you have applied for and received many types of loans in the past, which means that borrowing money from a bank is nothing new to you and shows lenders that they can trust that you will pay your loan back on time and with interest if they give you a loan now. Bad credit indicates the opposite. Frequent late payments and non-payments mean you don’t have a good repayment history, making it easier for lenders to worry about giving your money back.
With good credit, you will save money on interest rates and have more options for finding a home loan. You could qualify for lower interest rates with better terms and lower monthly payments with a good credit score. Having good credit can help you find the best rates on mortgages and other types of financing in the future. There are different types of loans, rates, and terms that might be perfect for your situation. The best way to find out which one is the right fit is by understanding how it all works.Â
Why do you need Good Credit?
Having good credit is extremely important for buying a home, as well as refinancing. Good credit may be more of an issue with mortgages than any other form of lending. Why? Because good credit is an indicator of how you handle debt. This becomes very important when the bank gives you a lot of money – it needs to know that you will pay it back!
Good credit scores tell banks and other financial institutions that you are financially responsible and have predictable earnings—allowing lenders to see what your payments should look like for at least the next two years of borrowing. When people think about good credit, they typically think of interest rates or how much money they pay for things with their cards. Good credit opens doors beyond getting lower interest rates on many things.
How Credit affects your Mortgage
Your credit affects your mortgage in several ways. Good credit will help you obtain a better interest rate, while bad credit will make the process more difficult. Mortgage lenders are more likely to offer lower interest rates to people with good credit since it is less risky. Good credit will make the application process more accessible and can make the settlement process smoother.
The majority of lending institutions use a credit rating scale to determine the risk associated with lending money. Good credit helps you find better mortgage rates because it’s more unlikely for someone with good credit to default on a home loan. When applying for a mortgage with good credit, the borrower should expect an easier time getting approved for home loans than borrowers with poor credit scores. Good credit can help borrowers get a reasonable interest rate because good borrowers are considered less risky.
Mortgage Types and your Credit
It’s important to note that mortgage rates are usually broken down into four types: fixed, variable, conforming, and jumbo loans. When purchasing a home, you must know the best mortgage for your needs.
Fixed-rate mortgages mean your interest rate and monthly payments will remain the same for the entire loan term, typically 15 or 30 years. Your down payment amount and home purchase price are also factors determining your interest rate with this type of loan. With bad credit, you’ll likely pay higher interest rates for your fixed-rate mortgage compared to those who have good credit scores. The best thing about getting a fixed-rate mortgage is you’ll know what your monthly payments will be each month for the length of your loan term. Â
Adjustable-rate mortgages (ARM) work differently than fixed-rate mortgages in that their interest rates change periodically based on market conditions. With an ARM, you can expect to have lower initial payments, but instead, your rate might vary based on current interest rates. If these rates go up, then so do your payments. These changes can be upward or downward, which will affect your monthly payment as well as your loan cost. The main advantage an ARM offers is lower initial payments so you can afford to buy a more expensive home.
Conforming Loan Mortgage rates are set by the federal housing finance agency (FHFA). The FHFA sets these rates based on the average interest rates recently published by Freddie Mac for 30-year mortgages with 20% down payments made at loan closing. High credit scores lend themselves well to conforming loans because they allow lenders to offer borrowers exceptionally low interest rates on their mortgages. These low-interest rates can save potential homeowners thousands of dollars over the life of their loan.Â
Jumbo loans are not subject to any federal underwriting standards or trade requirements, and as such, can be purchased by any buyer. Jumbo loans rely solely on the creditworthiness and willingness of a prospective borrower to adhere to the terms and conditions of the loan. Lenders may choose not to sell their jumbo loans, or they may offer them at interest rates that tend to strike a balance between prime and jumbo loans.Â
Conclusion
Having good credit is extremely important for buying a home, as well as refinancing. Good credit may be more of an issue with mortgages than any other form of lending. Why? Because good credit is an indicator of how you handle debt. This becomes very important when the bank gives you a lot of money to use every month – they need to know that you will pay it back. A good credit score affects your interest rates and payments; the better your rates, the better your mortgage.Â
With a mortgage, your credit score is an essential factor in determining whether you will be approved for a loan and the price of your mortgage. To ensure that you are getting a competitive rate, you must maintain good credit by paying bills on time while keeping balances low or nonexistent. If this sounds like something you need help with, reach out to Movoto today. Our team can provide insight into how improving your credit score could affect your mortgage application process or other real estate needs.
