Buying a house isn’t an easy process. Not only does it involve searching for the house of your dreams that a) has enough room for you and your family, b) is within your price range, and c) is located near your job, but it’s also never guaranteed that you’ll even be able to close on it. Why? Because a number is known as your credit score.
If you’re not already acquainted with this mysterious number, then it’s time you should be. Your credit score, which is acquired based on your financial history, can make or break the home buying process. If you’re planning on buying a house either in the near or far future, tune in.
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Here’s why excellent credit is crucial to the home buying or refinancing process:
You Won’t Be Able to Take Out a Mortgage
Your credit score is based on a range of factors, and a poor credit score indicates that you have been irresponsible with money, have a high debt-to-income ratio, and/or don’t have a lot of experience with paying off loans or credit cards. Most lenders aren’t going to feel willing to allot hundreds of thousands of dollars to someone who may not be able to pay it back.
Those who aren’t able to pay their mortgage often find themselves in a short sale, which means they end up selling their home for less than what they owe on it. If you’re wondering how a short sale can affect your credit even further, the credit agencies note that you weren’t able to take on a loan, which can bring your score down over 100 points. These scenarios aren’t great for lenders, and they can put everyone involved in a sticky situation.
Your Interest Rate Will Be Higher
In almost any case, the lower the credit score, the higher the interest rate. It’s cruel, but it’s the reality of how credit works. If you don’t have a stellar credit score, you may have to pay thousands of dollars more back on your mortgage than if your score was just 50 points higher. Financial responsibility pays off, so it’s best to get started on building credit while you can. Start by finding your credit score and paying off as much debt as possible. Have no credit history? Open a credit card with a low limit and go from there! A lower credit score will not prevent you from refinancing your home, however, it may prevent you from getting a lower interest rate on the new loan.
How Can I Build Credit in Order to Take Out a Mortgage
If you’re still a long way out from buying a home and settling down, then start by paying off debts, making sure you pay everything on time and continuing to be responsible with how you spend your money. Close to buying a house and concerned about your credit? Talk to a top real estate agent about the best options for your situation. The resources available at Banks.com are also excellent for financial planning and helping you rebuild your credit so that when it does come to taking out a mortgage, you’re ready to go without a problem.
