If you are trying to secure financing for a home one of the most important factors that will come into play is your credit score. The credit score plays a major role in determining the terms and interest rate of a mortgage loan and lenders generally take these scores very seriously. Although in the past the influence of credit scores was intentionally diminished so that banks would be able to provide financing to those that would not normally qualify n today’s economy the credit score is back and more important than ever.
Figuring out how your credit will influence your mortgage interest rate on a basic level is rather easy. The higher the credit score the lower the interest rate and the lower the credit score the higher the interest rate. If you score is below a certain number many lenders will not lend to you at all because they will consider you to be too much of a risk. Fortunately, your credit score is not viewed by lenders in a vacuum, meaning that they take into account your credit history or lack thereof when making a decision. For example, if you have a low credit score because you have a lack of credit rather than bad credit many lenders will look more favorably on you than if you have a low credit score due to bad reports on your credit history.
While you credit will influence your interest rate in many cases it will also dictate the terms of any home loan that you are able to get. If you have a low credit score chances are the lender will try to push you into a short term 15 year mortgage instead of a long term 30 year mortgage because it will mean that they take on less risk even though it will also make it harder for you to keep up on your payments from month to month. Since a low credit score or low credit rating can result in such a bad mortgage interest rate it is ideal for some potential home buyers to wait a few years until they are able to repair their credit before they try to get a home loan. This short term sacrifice while you repair your credit can save thousands of dollars in interest down the road.
If you have bad credit it will also increase the importance of shopping around for the best mortgage interest rate possible since most lenders will likely try to hit you with a high interest rate if they are willing to lend to you at all. Potential home buyers with less than stellar credit could also consider having a friend or family member cosign on a home loan in order to get a better interest rate. Having more people sign on a home loan will make a lender feel more comfortable about collecting their money because if you don’t pay they can always go after the other people that co-signed on the loan, even if they do not live in the home that the loan was for.