As today’s prospective homebuyers face high home prices and rising interest rates, there is one thing they can do to save money: improve their credit score.
“This is something buyers can do to save a little money in this market,” said Amanda Pendleton, consumer finance expert at Zillow Home Loans.
New Zillow analysis finds that homebuyers with lower credit scores can pay $103,626 more over the life of a 30-year fixed mortgage loan than someone with an excellent score, based on the current price of a typical house, $354,165.
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Buyers with fair credit scores (between 620 and 639) may be paying $288 more per month for their monthly mortgage payments compared to homebuyers with excellent scores between 760 and 850.
This difference is due to the interest rates that borrowers charge. While a fair credit score qualifies for an interest rate of 6.688%, an excellent score can lead to a much lower rate of 5.099%. Calculations are based on home values from the Zillow Home Value Index and interest rates from the FICO Loan Savings Calculator as of July 26.
Credit is one factor that homebuyers can control
“Affordability is the biggest story in the housing market right now,” Pendleton said.
“We’ve seen home values across the country increase almost 20% year over year,” he said. “When you combine that with these rising mortgage interest rates, the typical monthly home payment is 62% higher today than it was just a year ago.”
If you’re a buyer in today’s market, many factors are out of your control, Pendleton said. But you can monitor your credit and financial history.
Your credit score measures your likelihood of repaying a loan. Mortgage lenders use these scores to determine whether to offer you a loan and the interest rate you’ll pay on that debt.
Your credit score is determined by factors considered in your credit report, such as your bill payment history, unpaid debts, the number of outstanding loans you have, how long these accounts have been open, how much credit is available you are using and new credit. applications you have made.
Your credit score may vary depending on the company that provides it. Scores typically range from 350 to 850.
Moves with the “biggest impact” on your credit score
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“It really pays for a buyer to take steps to improve their credit score and also shop for a mortgage while we see rates going up,” Pendleton said.
If you’re thinking about buying a home, you want to think about your credit score at least six months before that goal, Pendleton said.
First, check your credit report, which you can do to check weekly free until the end of 2022, to help you get an idea of what a lender will see when they pull your credit. In general, those free reports available once a year
Keep an eye out for anything that seems wrong, such as incorrect information you want to dispute or late payments you want to avoid in the future.
Then make a plan based on your current credit profile.
This can include paying down debt to less than 30% of your limit. “This will have the biggest impact on your score in a positive direction,” Pendleton said.
Be consistent with your bill payments, like credit cards and car payments, and make sure they’re on time.
As you get closer to your home buying goal, avoid making larger purchases that need to be financed, such as buying a car or new furniture, as this will negatively affect your debt-to-income ratio. Applying for new credit cards or loans can also affect your score.
The good news is that you may be able to raise your credit score in as little as three to six months, depending on your credit history, Pendleton said.
Also, if you’re going in as a first-time homebuyer with a lower credit score, explore other loans and programs that may be available to someone who fits your profile.
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