3 Reasons Aspiring Homeowners Should Repair Their Credit
If you’ve been dreaming of leaving renting behind and embarking on the adventure of owning your own home, you’re in great company. But it’s also a competitive market, so you need to prepare your life and finances for these real changes before you start looking at random home listings online.
Saving for a down payment is a big deal these days, but beyond that, you also need reasonable credit (I didn’t say you need it). Perfect credit transaction). This may take years to achieve. Especially when a crash-and-burn style disaster of life gets in the way. Medical bills, car accidents, long-term unemployment, etc. can take a huge toll on your credit, but they won’t last forever. We can fix these problems and bring it back to its former glory.
Now is the time to start rebuilding your credit. Here are three reasons why this is important:
1. You will be offered a lower mortgage interest rate.
Yes, you may have heard it here for the first time, or maybe it’s your second or third time. But the most important and obvious reason to rebuild your credit before you even think about buying a home is that you’ll pay less interest over the life of your mortgage.
The Consumer Financial Protection Bureau (CFPB) has a neat tool that can estimate your mortgage interest rate based on location, credit score, purchase price, and other factors of your future loan, such as down payment.
For example, a Missouri resident with a credit score of 620 who wants to purchase a $350,000 home with 10% down using a 30-year fixed-rate mortgage can expect an interest rate of 7.750% as of May 29, 2024. On the other hand, if your score is 780 or higher, the interest rate will be 7.125%.
The CFPB estimates that over the first five years, a higher rate will add nearly $10,000 more in costs. After 30 years, the cost rises to $48,415.
2. Mortgage insurance may be cheaper
Here’s a dirty little secret that many lenders may not tell you. Your private mortgage insurance is “private” because it is underwritten by a private company, which is why your credit score is taken into account when determining your interest rate.
MGIC, one of the major companies that offers this insurance, publishes a price list for the monthly premium paid by the borrower, which is the portion of the mortgage insurance you will pay each month. If you, like many first-time buyers, have a 95% loan-to-value ratio, you can expect to pay significantly different interest rates depending on your credit score.
If your credit score is 620, you’ll pay 1.42% of your monthly payment in mortgage insurance. If your credit score is 700, you’ll pay just 0.78%, which is close to half.
3. Your homeowners insurance premiums may be lower.
This is a much lower level of coverage because there are many external factors that affect homeowners insurance premiums. For example, if you’re buying a home in a tornado-prone area, it may not matter how good your credit is. Insurance premiums will be quite high.
However, in many states, your credit score is still part of the homeowner’s insurance premium calculation, so the higher your score, the higher your rate. Even if you escrow your insurance, the company wants to know that you are willing and able to pay on time, even without escrow.
This also applies if you are interested in additional insurance for risks that are common in your area but do not require coverage, such as bushfire insurance or additional wind insurance. So, with a better credit score, you can save on several insurance policies.
Increasing your credit score can make your home more affordable
One of the reasons we buy homes is to create a home where our families can safely grow and explore. But the other part, let’s be honest, is to control housing costs as much as possible.
Expenses like taxes and homeowners insurance are always in flux, but the work you’ve done to improve your credit over time can make it easier to budget for a lower home payment. It’s tempting to rush and ignore even a few percent change in your mortgage interest rate, but remember that it all depends on your credit score, so the costs can really add up.
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