By Bill Gassett
We should all make sure we look after our finances, especially when a home purchase is on the horizon. Your financial well-being can have a huge impact on the interest rate you'll end up paying on your mortgage. Most lenders, whether U.S.-based or not, are going to check your financial status before they even start talking about prevailing mortgage interest rates. In other words: Your credit score really matters!
It all starts when you get your first job or credit card. These days, many leading credit agencies take into account credit cards controlled by parents, as well. As long as your credit card has your name on it, you will have started what can only be described as your "credit career." It's vital to look after your credit if you want to pay less for future loans such as mortgages.
Your credit score can have a dramatic effect on being able to achieve the lowest home mortgage interest rates. While interest rates are a key component in choosing a lender, don't think for a moment they are the only criteria. A lender's personal service and attention to detail are also vital. Your mortgage brokers should be knowledgeable and be able to answer important mortgage questions with ease.
How to Protect Your Credit Score
To make sure you can enjoy the best interest rates when you take out a mortgage, there are some factors that are more important than others. The first one may seem like a rather quirky one: Believe it or not, it is a good idea to have some kind of credit agreement. It doesn't matter if it's a credit card or auto loan. A prospective lender may not even look at the amount of the loan, but they will certainly make sure that you have been making payments on time.
Late payments are red flags to any lender. Make sure you're fully committed to any loan you take out, and you can afford to pay it back. Being fiscally responsible is a staple of homeownership—and your credit card balances are loans.
Another crucial consideration is making sure you maintain your income level. This is another thing lenders will take into account when granting loans.
It's highly advisable to check your credit report at least once a year. You can actually check your credit score for free once a year with each of the three major credit bureaus: Equifax, Experian and Transunion. It's easier than ever before for someone to "borrow" your credit score. Make sure all of the information is correct. If you notice something suspicious, you need to contact the credit agency as soon as possible. Mistakes or fraud can certainly impact your score.
It can be tempting to think that not borrowing any money will make you the perfect candidate for a low-interest mortgage. Unfortunately, this is not true. Lenders are anxious to see a credit score, and without any credit information, you're likely to end up with a bad interest rate.
Raising Your Credit Score
Unfortunately, not all lenders tell you about the factors that can influence your credit score. Card surfing or changing credit cards often in order to pay off balances will not do you any good. You may not be aware of this, but when you apply for almost any financial product, a lender will check your credit report. If you do so a couple of times over a 12-month period, it can adversely affect your credit score, so don't be fanatical about checking every few months.
Many of us are even tempted into changing banks. The banking business is as competitive as any other business. These days banks are forced to work more or less like retailers. They offer "deals" on their bank accounts and associated products. This is another occasion when your credit report will be pulled. Any bank search will show up and can affect your score.
If you plan to take out a mortgage in the next couple of years, it's vital you work towards raising your credit score. You likely have a bit of a plan when it comes to your personal life. It is, however, just as important to have a plan when it comes to your personal finances. Having one can mean the difference between paying a high interest rate compared to a low interest rate.
Organizations That Aren't Lenders Can Pull Credit
Some organizations that aren't lenders or suppliers of financial products can also check if you have any financial issues. Be very careful when it comes to organizations such as country or golf clubs. Before you sign on the dotted line, you want to make sure they are not going to credit-check you. Why do they credit-check you? Many of them have reoccurring fees and they want to make sure you can afford to pay them.
Making sure you get the best interest rate on your mortgage is about so much more than applying for the mortgage itself. Plan ahead and try to stay on top of your finances. This will make things easier when you fall in love with your dream home.
Be Fiscally Responsible and Pick the Best Lender
So much of buying a home will hinge on your finances. Smart folks make sure they have a financial plan in place years in advance of purchasing a home. When the time comes to look at properties for the first time, you'll be in a much better position if you pay attention to your finances.
Keep in mind there are going to be lots of lenders vying for your business. Like anything else, you should be shopping for the best lender. There are tons of different types of mortgage loans available, especially for first-time buyers. In fact, there are so many programs, it's easy to get overwhelmed if you don't have someone advising you properly. Given this, it's essential that you speak with a really good mortgage broker or financial planner who will understand your goals.
Do you want a 30-year or 15-year mortgage? Should you go for a fixed- or adjustable-rate loan? Is there a special mortgage program that you qualify for, such as a VA or FHA loan? These are all vital questions to ask a lender. The answers will determine a significant portion of your financial future with owning a home, so put the necessary time in to make the best choice.
Buying a house is a significant step in one's life. Doing so with a sound financial plan will make things go a lot smoother with significantly less stress. Proper planning will help make your goal of homeownership a reality with far fewer headaches. Do your best to make sure your credit scores are sound. Best of luck when the time comes to purchase a home!
Bill Gassett is a nationally recognized real estate leader who has been helping people buy and sell Metrowest Massachusetts real estate for the past 32-plus years. He has been one of the top RE/MAX REALTORS® in New England for the past decade. In 2018, he was the No. 1 RE/MAX real estate agent in Massachusetts.