A home mortgage loan is likely the biggest financial investment a consumer will make in their lifetime, and should really be the only loan you’re willing to go into debt for. It is therefore wise to truly consider how such a huge financial step will impact your current financial situation as well as your future one. Being in debt for the next thirty years is no one’s ideal plan but with a solid credit score as well as a reasonable savings plan set up before obtaining a home loan, you can not only be financially secure, you can also relieve yourself of the mortgage debt in a shorter amount of time.
How Credit Affects Mortgages
A mortgage lender will use a consumer credit score to first determine the eligibility of the loan applicant and then to establish the interest rate the applicant will pay over the life of the loan. With a high credit score, a mortgage loan can be granted at relatively low interest terms. A half of percent can make a difference of tens of thousands over the course of the loan. With a low credit score, borrowers will be subjected to unfavorable interest rates that may become a burden down the road.If you already have a solid credit score to afford lower interest rates, it may be reasonable for the borrower to pay more money towards their monthly house note as long as fees are not part of the equation for early payoff. By eliminating such a big financial obligation, you will also increase your score. This will serve you well in terms of financial security later in life, especially if you plan to stay in your home for years to come.
The best way to ensure you’re eligible for a low-interest rate mortgage is to start early by checking credit reports and scores from the major credit reporting agencies as soon as you know you want to buy a home. If you find your credit score is not up to par (720 or higher should be your target), take the time to improve scores by paying existing bills on time each month and refraining from applying for new lines of credit before the mortgage loan is complete.
Why Savings Matters
Another way you can reduce the debts of a home mortgage while you build your score is to stash away money to be used towards a down payment on the home you choose to purchase. In most cases, lenders want to see at least 20% of the home price put down by the borrower before the loan will be approved at a good interest rate. There are programs such as FHA loans that will allow for smaller down payments but the reality is that the more money you can put down up front, the less money you’ll have to finance. Smaller loan amounts mean you can likely pay off the loan in a faster period of time. Establishing savings goals early can make achieving your down payment goals possible. You can save up smaller increments of cash over a longer period of time in order to achieve your goals. It is a less stressful way to build up a down payment for a home than to have to come up with larger lump sums closer to the mortgage approval time. Savings goals should be constructed realistically and be based on your income and other financial considerations. Some people like setting an amount from each paycheck aside, anywhere between 10 to 30 percent. The more time you plan to save, the more likely you are to achieve your down payment savings goals.
Between the work it takes to improve or repair bad credit and the amount of money you have time to save, there is a lot of work to be done before applying for one of the biggest loans of your lifetime. It is equally important to shop around for a lender that matches your financial needs and understands your financial matters. All of these steps take time to complete correctly but if done, can result in faster elimination of a home loan debt as well as better terms and conditions for the home loan itself.
Ed O’Brien is a seasoned writer in personal finance, specializing in credit repair. You can find more of his articles located at CreditRepair.org.
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