It’s not like window shopping or browsing around in the Burbank Town Center. Buying a property has many factors impacting your decision, one of which is a good credit score. A credit store, as defined by Investopedia is, “a statistical number that evaluates a consumer’s creditworthiness and is based on credit history”. It’s a mouthful so let’s translate that into human terms. You get a certain rating for your ability to repay your debts. The rating score combines all the credits you have taken from anywhere and everywhere. Whether it’s your credit card, car loan, office loan or lease of equipment, they make up your credit score.
What is a good credit score?
Most lending institutions have an agreement that they will rate an individual based on credit score as accepted by a scoring system by FICO and VantageScore. Your credit score can range anywhere between 300 and 850, although nobody really wants a loan if they have 300 below score. The scoring is broken down into statuses like this:
- 300 to 649 – poor
- 650 to 699 – fair
- 700 to 749 – good
- 750 to 850 – excellent
The credit score system is accessible by all financial institutions including mortgage companies, banks, and private funding companies. So, when you go to them to request a loan, all they have to do is feed in your profile and security number to get your credit score.
Why does a good credit score matter?
Now that you know what a good credit score is, you might be wondering what does that have anything to do with you buying a property. After all you have the amount and are able to pay back the loan. Well, it doesn’t work that way. Lenders are cautious creatures. They like to make sure that whoever they give their money to, hold minimum risks for them in the future. Your credit score works like a risk scale. While they won’t outright refuse your loan, they will sort of make sure that they get their returns for the risks they take.
So, when you have a good credit score lenders reward you with less interest rate. On the other hand, if you have bad credit score you’ll get higher interest rate on your overall loan.
For example, let’s say you’ve zeroed in on a property that costs around $250,000. You have the required down payment of 20 percent but need the rest from a mortgage company. If you have a credit score of say 750 then there’s a good chance that lender will approve your application more quickly, and offer you a loan with markup of say 3.1 percent.
However, if you have a credit score of say 500 then its likely that you’ll get the loan but at an interest rate of 4.0 percent. After nobody wants to give loan to a bad credit property owner. The difference could cost an additional $10,000 to $20,000 in loan repayment! That’s why a good credit score is so important.
How to improve your credit score?
As mentioned earlier, a credit score makes up of all the loans you’ve secured throughout the history of your life. The credit score is not only made up of credit history but also a bunch of other factors such as:
- Regularity of payments
- Total amount in credit
- Time frame of all credits
- Types of credit
- Any addition of new credit
- Credit available
They all make up sort of a whole picture of your financial life. Knowing these factors can help you to improve your credit score by tackling them one at a time. We recommend that you get your credit score out before you apply for a mortgage for buying a property. This way you’ll get an estimate of where you stand, your budget and whether you should go for an additional credit loan, or hard money loan.