The money you need to borrow to buy a house (after making a down payment) is your mortgage.
In addition to the amount borrowed, your mortgage comes with a small percentage number, which represents the amount of money you give to your lender each month. That money is the direct financial cost of borrowing the rest of the money, and the percentage is called your mortgage rate. The lower that percentage is, the better, since that means it costs you less to borrow the same amount of money. You typically qualify for a lower rate if you have good credit. Your credit score directly affects the mortgage rate for which you will be eligible on your borrowed money. Suppose you have a credit score of 800 (nearly perfect), and you hypothetically qualify for a good mortgage rate like 3.75%* on a fixed interest loan. If your credit score is somewhere around 600, that same loan may require you to pay a dramatically higher percentage of interest, perhaps 5%*. Though it may seem small, the difference between 3.75% and 5% is quite significant when it comes to such large payments spread out across such a long time. Over the life of the loan, a person with good credit (and a low interest rate) may easily pay tens of thousands of dollars less than a person with poor credit (and a higher interest rate on their mortgage.) This is just one reason why maintaining a good credit score is so important. Although you are more likely to receive a loan if you have a good credit score, you may still receive a decent mortgage rate if you have no credit but can prove you are financially responsible. If you have no credit history, you may still be approved for a mortgage loan, but through a process called “manual underwriting,” in which additional documents are submitted to prove your ability to pay your loan back. When people are turned down for a mortgage loan request, it is often because they have a poor credit score. Poor credit is frequently the result of being late on previous loan or credit card payments. There are a variety of opinions on how to build a better credit score (and a large number of free websites to help you to improve yours – like this popular one), but most financial experts agree that in order to build a higher credit score you should:- Pay your bills on time
- Avoid high credit card balances (have available credit – don’t max out your cards)
- Pay off other debts
- Don’t apply for too many credit cards too frequently
- Watch your credit reports and work to resolve any incorrect information quickly
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