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High Mortgage Payment? Check Your Credit Score

By | Mortgage

Did you calculate the cost and find out your mortgage payments will be high? If so, your credit score could be to blame.

Buying a Home With Average Credit

You need a FICO score of 620 or more to be taken seriously by most traditional lenders. With FHA financing a score of 580 or more is needed, but FHA loans come with other requirements.

The thing is, you don’t want to just have a “good” credit score. There’s a big difference when you’re buying a house. It’s too big of a loan to approach when you’re not an optimal borrower.

The Difference in Monthly Payment Costs

The biggest comparison to make is a $200,000 loan over 30 years. With a FICO score of 620 to 639, you’re looking at a 4.79 percent APR rate. This comes with a $1,048 monthly payment. A borrower with a FICO score between 700 and 759 will pay $890 a month.

As a result, improving your FICO score before financing a $200,000 mortgage can save you $150 a month. There are other poor terms that come with a low-grade home loan. You might effectively lose as much as $250 a month as a result of not qualifying for a better mortgage.

The Cost of Buying a Home by FICO Score

It’s common knowledge that your credit rating affects your interest rate. However, not many realize how much of an impact it will have on the overall cost of your new home. So it’s interesting to see what you can expect to spend when buying a home — based on your FICO score.

Take a look below for a rough run-down with an analysis for a home buyer with a FICO score in the 620 to 659 range. This information comes from the Loan Savings Calculator on myFICO’s website.

Interest Cost Differences

In this score range, you can expect an APR between 4.244 and 4.79 percent. Say you’re borrowing $80,000 toward a home and you plan to pay it off in 15 years.

This averages out to between $574 and $596 a month for mortgage premiums. It also means $23,340 to $27,253 in total interest paid over the 15-year term.

How Much Can You Save on a $200,000 Mortgage Loan?

This scenario gets even more interesting when you look at the purchase of a $200,000 home loan. Borrowing that amount requires having a sizable down payment or income.

This loan will cost a lot more if you take it on while you have only average credit. You might find yourself opting for a 30-year term to avoid the high monthly payments. In this case, the interest difference can “blow your mind” when you discover it.

A low 600s credit rating would mean approximately $150,000 to $175,000 in interest paid over 30 years on a $200,000 loan.

Borrowers with FICO scores in the low 700s can expect to receive $40,000 to $60,000 in interest savings.

Other Benefits of a Better FICO Score

With a strong FICO score, you can bully around lenders. When buying a home, this means you have the power to negotiate the best APR rate possible.

This means you can save a lot on your interest payments. This results in a lower monthly payment too. You could save as much as a few hundred dollars a month.

Being able to pick and choose between lenders is a good thing for other reasons, too. You can gain access to terms like “early buyouts without penalties,” which is hard to find.

This is especially beneficial if you inherit a lot of money or win the lottery. The loan term will make it so you can pay off your last month of interest and buy out the rest of the loan.

Don’t Forget About the Refinancing Dilemma

Next, you need a strong FICO score to qualify to refinance your mortgage. Having the bare minimum is not good enough if the borrowing requirements change over time.

It’s also not helpful if you end up with another blemish that pushes your score below the minimum. When your loan term is up, you might find yourself selling the house or foreclosing if your credit score is low.

The same is true if you’re using a co-signer to qualify for the mortgage. If this person cannot qualify anymore, you might not be able to pull the weight when you attempt to refinance. Since you only gain considerable equity in the later years (due to more interest paid upfront) this is a serious disadvantage.

Remember What Happens Next

When you first take on a new loan, your credit score drops before it ages a bit. The negative effects of the new debt become less month by month. In the end, your good repayment history and strong utilization rate will result in a higher FICO score.

However, in the near term your credit rating will suffer. The large home loan will make you seem like a bad borrower. So you might struggle in financing for even smaller things (like store cards) in the first six months after you finance your home.

Conclusion

If you take in anything from reading this, it should be the fact that a better FICO score means a better loan. This is true whether you’re buying a car or a house. It’s even true when you’re trying to take out a second mortgage.

We went as far as to cover a piece listing four reasons your credit score matters during retirement. You can read that blog post and find even more reasons why you’ll want to build your score before it’s too late.

How Credit Scores Impact Mortgage Loans

By | Credit Repair, Credit Scores, Home Buying, Loan, Mortgage, Your Credit

Credit Scores Impact Mortgage Loans

Are you working towards financing a home? You probably know how your credit rating will impact your loan qualification. You pretty much need the minimum credit rating for FHA home loans, which is a 580 FICO score. If you cannot qualify for FHA insurance, you will be hard-pressed to find any lender until you fix your credit.

There are many implications that your credit rating can have on your prospective home loan, such as whether you actually qualify for the mortgage, how low of an interest rate you will get and what type of lender will work with you.
Now, there’s also an unspoken factor: how much your mortgage will cost in total.

How Your Mortgage Could Cost More

When you apply for home financing with a bad credit score, it is unlikely that a major bank will approve you. Since it is the major banks that get the best borrowing rates in the first place, your alternatives will be more costly. In the worst case scenario, only a private lender would consider you.

You might be somewhere in the middle and can get a home loan through a financial institution that accommodates bad credit borrowers. There are many reputable lenders in this area, but you still face the issue of a higher interest rate. This is because the banks know you are a higher risk.

Tip: Get your mortgage through a highly legitimate financial institute that works with bad credit borrowers while also offering traditional home loans. That way, you can repair your credit while holding the costlier loan and refinance under the same lender after your credit score improves.

Your credit score does not have to hold you back from a mortgage. You just need to make sure it’s not unexpectedly costing you extra.

What Will Your Credit Score Cost You?

When applying for a home loan, your decided interest rate is mainly calculated based on your credit score. So if you were to apply for a mortgage right now, what would this mean to you?

It all depends on where you live …

Let’s use Manhattan, New York as an example, seeing as how even a one-bedroom will easily set you back $400,000 or more.

Say you are buying an apartment for $400,000 and you give the minimum of 10 percent down. This leaves you with a $360,000 principal to finance through a mortgage provider. Let’s say the mortgage will run for 30 years and it’s a fixed-rate loan.

Below shows your total interest cost for the lifetime of the mortgage. These calculations come from MyFICO.com’s Loan Savings Calculator, which estimates your interest rate based on your FICO score range.

  • 620 to 639 FICO score: $319,418 total interest (4.793% APR)
  • 640 to 659 FICO score: $277,706 total interest (4.252% APR)
  • 660 to 679 FICO score: $245,727 total interest (3.825% APR)
  • 680 to 699 FICO score: $230,167 total interest (3.613% APR)
  • 700 to 759 FICO score: $217,414 total interest (3.437% APR)
  • 760 to 850 FICO score: $201,683 total interest (3.217% APR)

To put it into context, you are looking at saving $117,735 over 30 years by financing with perfect credit instead of below-average credit. From another perspective: your monthly payment will be about $327 less!

How to Make Your Mortgage Cost Less

There are some tricks that can help you qualify for a more affordable mortgage. Four simple ways to do this include:

1. Refinance Your Mortgage After You Buy

Your mortgage payments go through on time for half a decade, and suddenly the huge debt does not keep your credit score suppressed. The result could be seeing your credit rating go up by a considerable amount since when you first qualified for the mortgage. If this is the case, you could refinance the mortgage to lower your interest rate and ultimately make the rest of the mortgage term cheaper for you.

2. Rent-to-Own the Place First

If you are repairing your credit, but you want your new home now, you could try to buy through a rent-to-own agreement. You will be able to guarantee the seller gets the asking price as long as you follow through with financing at the end of the term. While the rent-to-own contract will set you back a little in equity, the much lower interest rate will create much more savings.

3. Wait a Little Before Buying

While this is not the most exciting solution, sometimes it makes a lot of sense. Say you have a bad debt in collections from six years ago. If that’s the case, waiting roughly a year will cause the negative item to leave your credit report and thus it will not hold back your FICO score. The end result could be a huge boost in your credit rating, or at least enough to score you a better interest rate.

4. Purchase Under Owner Financing

If you want your new home now, but rent-to-own will not work, you might be able to purchase via owner financing. This means the seller holds the mortgage for you for so long (usually 1 to 3 years), and then you can get your mortgage and make a balloon payment to buy it out. You can use the in-between time to repair your credit and this will help you secure a good interest rate. In the meantime, you will be paying on the home under the current mortgage conditions and your bad credit status will not cost you more.

Owner financing is really the only cost-effective and sound way to approach buying a home with bad credit. Otherwise, you could be throwing well over $100,000 out the window. That’s a lot of extra money to pay, especially if you are actually eyeing a one-bedroom apartment.

To conclude, get your credit repaired before applying for a mortgage because the cost of doing so is minuscule in comparison to what you will save on interest payments.

Sources:

  • http://www.fha.com/fha_credit_requirements
  • http://www.myfico.com/crediteducation/calculators/loanrates.aspx
  • http://www.investopedia.com/articles/mortgages-real-estate/10/should-you-use-seller-financing.asp

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