As today’s potential home buyers face high home prices and rising interest rates, there’s one thing they can do to save money: raise their credit scores.
“This is something buyers can do to save a little money in this market,” said Amanda Pendleton, consumer finance expert at Zillow Home Loans.
A new analysis from Zillow finds that home buyers with lower credit scores can pay $103,626 more over the term of a 30-year fixed mortgage loan than someone with an excellent score, based on the current price of a typical home, $354,165.
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Buyers with reasonable credit scores — between 620 and 639 — may pay $288 more per month for their monthly mortgage payments compared to homebuyers with excellent scores, between 760 and 850.
That difference is due to the interest rates charged to these borrowers. While a reasonable credit score qualifies for an interest rate of 6.688%, an excellent score can yield a much lower rate of 5.099%. The calculations are based on home values from the Zillow Home Value Index and interest rates from the FICO Loan Savings Calculator as of July 26.
Credit is a factor home buyers can control
“Affordability is the housing market’s biggest story right now,” says Pendleton.
“We’ve seen house prices across the country rise nearly 20% year over year,” she said. “Combining that with these rising mortgage rates, the average monthly payment for a home is 62% higher today than it was a year ago.”
If you’re a buyer in today’s market, you have many factors out of your control, Pendleton said. But you can manage your credit and financial history.
Your credit score measures your likelihood of paying back a loan. Mortgage lenders use those scores to determine whether they’ll offer you a loan, and the interest you’ll pay on that debt.
Your credit score is determined by factors considered in your credit report, such as your payment history, unpaid debts, the number of outstanding loans you have, how long those accounts have been open, how much available credit you are using, and new credit applications you have done.
Your credit score may vary depending on the company providing it. Scores usually range from 350 to 850.
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“It really pays off for a buyer to take steps to improve their credit score and also shop around for a mortgage if we see rates rising,” Pendleton said.
If you’re considering buying a home, think about your credit score for at least six months before that goal, Pendleton said.
Check your credit report first, which you can check weekly free until the end of 2022, to give you an idea of what a lender is going to see when they take your credit. In general, those free reports are available once a year.
Keep an eye out for anything that isn’t right, such as incorrect information you want to dispute or late payments you want to avoid in the future.
Then create a plan based on your current credit profile.
That could mean paying off debts to less than 30% of your limit. “That will have the biggest impact on your score in a positive direction,” Pendleton said.
Stay consistent with your bill payments, such as for your credit cards and car, and make sure they’re paid on time.
As you get closer to your home buying goal, avoid making larger purchases that require financing, such as buying a new car or furniture, as that will negatively impact your debt-to-income ratio. Applying for new credit cards or loans can also hurt your score.
The good news is, you can boost your credit score in as little as three to six months, depending on your creditworthiness, Pendleton said.
In addition, if you’re buying a home with a lower credit score for the first time, check out other loans and programs that may be available to someone who fits your profile.