Your credit score plays an important role throughout your life. One very important situation will be when you apply for a mortgage loan to buy a house.
Lenders will closely examine your score before making a decision and your credit will affect the price of your mortgage in a couple different ways.
Interest rate on your loan.
When you take out a mortgage, you are borrowing money to buy your home. Like most loans, mortgages charge interest.
The higher the interest rate on your loan, the more expensive it will be to buy your house. More of your monthly payments will go toward paying interest and less toward paying off your home.
For example, someone with good credit would get a loan at 5.5 percent, whereas someone with bad credit would get 7 percent.
Considering how much money you are borrowing with your mortgage, your credit score can impact the price of your mortgage by hundreds, if not thousands, of dollars per year.
“Your credit score can impact the price of
your mortgage by hundreds of dollars.”
Loan limit and down payment.
Your credit score also affects the price of your mortgage by impacting how much you can borrow. Lenders are willing to give more money to someone with a good credit score than to someone with a bad credit score.
Someone with a worse credit score either needs to buy a less expensive home or come up with more money for a down payment. Either option is a cost associated with a worse credit score.
If your credit score is weak enough, you may not be able to qualify for a mortgage at all. This puts people with bad credit in a very tough situation to buy a home.
If you are in this situation, you could try asking a friend or family member with better credit to co-sign your loan. Otherwise, your credit will have to improve before you can get a loan.
A bad credit score makes a mortgage loan much more expensive and complicated than it needs to be. Use this as motivation to maintain good credit habits so you will not have these problems when you go to buy a home.
Photo source: worldpropertychannel.com.