Are you a first-time home buyer researching the significance of a credit score? Do you know how much value it holds for simplifying your home loan process? Credit scores play a vital role in the home buying process and help borrowers to save a lot of money in the long run. A poor credit score can have a negative impact on your mortgage terms like interest rates, repayment tenures, and much more. Keep reading to learn about the credit score needed for first-time home buyers and how to improve it.
What is a credit score?
A credit score is a three-digit number that signifies your spending and repayment history and patterns. Suppose you have taken a loan in the past and have not been paying the EMIs on time. This behavior decreases the credit score and reduces the chances of you getting a loan in the future. Similarly, a decent credit score of 750 or above represents that you are a responsible buyer and the lenders are likely to give you a loan at reasonable interest rates.
How to improve your credit score to apply for a home loan?
If your credit score is low, there are high chances that you will not qualify for the desired loan amount. It will make sense at that time to pause for a moment and focus on improving your credit score first. You can also use a monthly mortgage payment calculator to determine whether the EMIs of the desired loan amount is affordable or not. Here are a few tips to improve your credit score for getting a home loan:
Pay bills timely
Increasing or decreasing credit score is highly dependent on timely bills payments. Any delays in paying the bills will apparently be reflected on your credit report.
Maintain less balance in credit cards
It is always advisable by financial experts not to spend more than 30% of the limit on any credit card. This helps the users to monitor their spending behavior and only buy what their budget allows. This is known as credit utilization, and proves to be the second crucial factor that affects your credit score.
Monitor your credit reports
It is essential to monitor your credit reports at regular intervals to check for score lowering errors. If you find a dispute, you can instantly report them and claim a free credit report from credit bureaus.
Why is a credit score needed to apply for a home loan?
Lenders expect a flawless credit report to grant the desired loan amount. As discussed earlier, a high credit score signifies you are a responsible lender, and there is less risk involved with you defaulting on the loan amount. Lenders are likely to reward you with more choices and lower interest rates when you have a high credit score. For most homebuyers, at least 620 or above credit score is considered decent.
In addition, you can also prove your creditworthiness by making a substantial down payment. A high down payment also indicates you have a habit of saving and consistent cash flow in your bank; hence you will not default the loan amount.
Maintain a decent credit report and avail of home loans at low-interest rates!