Yes, it’s not like you want a bad credit status. Still, you have it, and the best you can do is try and improve it.
However, just before then, you need to take a mortgage. And you’re wondering if your bad credit status affects your mortgage. Well, the truth is that it does.
Still, how does it affect your mortgage? And how much effect does it have? Well, let’s find out.
What Is A Credit Score?
Your credit score is a number reflecting your financial well being and health. It’s more of a score that shows how well you are doing credit-wise.
You score high; then, you are an excellent borrower doing well. You score low; then, you are not the best borrower as you are doing bad.
Typically, it ranges from 300 to 900. And for you to have a good credit score, then you must fall above 700. Anything less, then you have a low or bad credit score.
Impact of Your Credit Score on Your Mortgage
Perhaps the first thing that your creditor checks are your credit score. And this is to show you just how important it is to your loan application, mortgage, or not.
Typically, your credit score will go a long way to determine the nature and terms of your mortgage agreement. Even more, it affects the totality of the deal.
Still wondering how? Here’s how your credit score comes to play.
Choice of Lenders
The first area that your credit score affects is your choice of lenders. That is, who you can approach for your mortgage application.
Usually, prime lenders will not accept a credit score that falls below the 600 or 700 categories. And in a case where your credit score is low, it means you cannot get your mortgage from them.
The news is that usually, they offer the best rates and terms.
While you might be able to access some lenders, you will find out that there is some exclusion, even with them. Usually, your credit score will determine whether you have access to some mortgage programs or not.
For instance, some lenders will not offer a loan if you want to purchase a second home. And your credit score is less than 620. So, your credit score affects your access.
Cost of the Mortgage
The cost of your mortgage largely depends on your credit score. And this is due to the enormous impact your credit score plays in your interest rate.
When your credit score is low, it means your lender is taking more risk. And to compensate for the increased risk, you need to pay a higher interest. In turn, this means higher monthly repayment and higher overall cost.
Alternatively, with a good credit rating, you can obtain your mortgage at a cheaper rate.
Your credit score also goes a long way to determine how much you can borrow. Usually, this gets calculated as a percentage of your property. For instance, a 80% LTV on a $200, 000 property is $160, 000.
However, in most cases, lenders determine this based on your credit score. As such, if you have a low credit score, you might be unable to reach a high percentage. And where you have a high score, you can get a higher rate.
Your credit score is crucial when it comes to mortgages. In fact, it will also affect how much you pay for your mortgage insurance.
So, commit to maintaining a good credit score.