Refinancing A Home Soon
When you're looking to buy or refinance a home, it’s important to qualify and ensure that you can make the monthly loan payment. However, you should also aim to get the best mortgage rate possible. While the loan rate percentage may seem small, the mortgage rate directly affects the amount of your monthly payment and how much you’ll pay over the lifetime of the loan. The lower the rate, the less you will pay!
Regardless of the various mortgage rates available, it pays to secure the lowest one—even if it means waiting until your FICO scores are higher. It will be worth it in the long run!
Credit Reports Determine Your Creditworthiness!
When you feel ready to apply for a mortgage, the lender will pull your credit reports to determine your overall creditworthiness. The information in your credit reports reflects how well you have managed your credit and finances. It includes current and old accounts, payment history (to see if you pay your bills on time), and any negative items such as charge-offs, collections, or bankruptcies.
With this in mind, if you're considering buying a home in the near future, you should start by reviewing the information in your credit reports as soon as possible. You need to have a clear understanding of what's in your reports before submitting applications to various mortgage lenders. Why? If you find false, inaccurate, or incorrect information, lenders will assume it’s yours and most likely deny you the loan. It’s to your advantage to have this information corrected prior to any lender seeing your credit reports. Even if you are approved, your mortgage rate may be higher, which could cost you thousands of dollars over the life of the loan. The solution is to clean up your credit reports before applying for a home loan.
Credit Scores Determine Your Mortgage Rates!
The information in your credit reports does more than help lenders decide whether to lend you money—it also contributes to your credit scores, which are one of the main factors determining the mortgage rates you can get. As a rule, higher FICO scores result in lower mortgage interest rates. According to Fair Isaac Corp (FICO), consumers with bad credit scores might end up paying hundreds, if not thousands, of dollars more over the lifetime of the mortgage solely due to higher mortgage rates.
When trying to establish credit history (15% of your credit score), you can't rush factors like the length of your credit history. However, recent payment history is weighted more heavily than older history, so this score component is not as difficult to improve. Payment history (35% of your credit score) is the most important factor, so make sure you pay all your bills on time during the 12 months prior to applying for your mortgage loan.
Additionally, everyone should aim to reduce outstanding credit card balances since the amount of debt (30% of your credit score) is a critical factor when lenders evaluate your debt-to-income ratio during the approval process. Lenders prefer to see longer credit histories, as this indicates consistency in your use of credit. Therefore, the more time you can take to build your credit prior to applying, the better your chances of securing the best interest rate. We recommend starting this process at least 6 to 12 months before applying.
