The importance of having a great credit score has never been more evident than it is in today’s housing market, where house prices continue to rise and mortgage rates have almost doubled this year.
While the average 30-year fixed-rate mortgage is now around 5.7%, it’s much higher for homebuyers with only “fair” credit – which translates to a FICO score between 580 and 669. Zillow experts estimate that someone with “fair credit” would pay nearly $104,000 more over the life of a loan than a buyer of the same home who had “great” credit.
Of course, most buyers sell or refinance their home long before they are 30 years old. On a monthly basis, a buyer with less than perfect credit would pay an additional $288 in interest each month they had the loan. In some cases, this added expense could prevent them from being approved for a mortgage.
Zillow estimates that homebuyers today can expect to pay about 62% more per month to buy a home in the United States at the usual price than they would have a year ago. Researchers looked at credit scores compared to current mortgage rates and found that monthly costs are much higher because lenders charge higher interest rates to borrowers with low credit scores or credit histories. less than perfect.
Understand your financial situation
Currently, someone with an “excellent” credit score — between 760 and 850 — can qualify for a 30-year fixed rate mortgage with an interest rate of 5.099%. However, a borrower with only “fair” credit could expect to pay 6.688%.
“When considering buying a home, the best first step you can take is to fully understand your financial situation, what you can afford, and your outstanding debts or obligations,” said Libby Cooper, vice president of Zillow. Home Loans.
Other Ways to Boost Your Credit Score
Cooper says it will pay to proactively raise your credit score before applying for a mortgage. There are several steps to achieving this goal, but the most basic is making sure you pay every bill on time each month.
Analyze your credit card balances. Credit agencies look at how much available credit you are using and reduce your credit if you use too much. For example, if you have a balance of $4,000 on a card with a credit limit of $5,000, your “credit utilization” is 80%. Strive to pay off the debt while asking the credit card lender to increase your credit limit. This combination will reduce your credit utilization percentage.
There is a shortcut that can also lower your credit usage. If a family member has a credit card with a high credit limit and a low balance, request to be added as a user on the account. Without ever making a purchase, your credit utilization profile will improve.
“Take realistic steps to improve your credit score by doing things like disputing any reporting errors and paying off as much debt as possible,” Cooper said. “It could increase the amount of home loan you qualify for.”