Why Credit Could be Considered the Most Valuable Factor of Your Mortgage Application

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If you haven’t yet, I suggest taking a look over The Pillars of a Home Mortgage Application before going on.

Credit is important, I’ve written about who reports it, what a credit score is, and what reports you need to pay attention to. But could it really be the most valuable factor for your mortgage application?

 There’s a few reasons why having the best credit you can when applying for a mortgage is beneficial, and they all point to getting you a better deal. Of all the tweaks and mortgage product variations, your credit is really what is going to put you in the best position, no matter what you want in your mortgage. I like to think about the parts of a mortgage like a test: you can try all different tricks to get the best grade on the test, but those who perform best have a strong history of study habits, and it shows in the end. You can’t trick a credit report, at least not legally, that is why it is so valuable to you and the lender. Your credit report shows the lender what level of trustworthiness you have when it comes to paying on time, and how responsible you are with holding debt. If you work hard to pay your debts on time, you should show it proud like a report card! If you’ve always been able to make payments, that most likely means you have a consistent source of income, another pillar of the mortgage application.
So how does having good credit get you a better deal for your mortgage? For one, it is one of the qualifying factors in being approved for certain types of loans that could benefit you. For example, FHA loans have a minimum credit score limit of 620.  Once you qualify, different credit scores are going to earn you different interest rates; the higher your credit score, the lower your interest rate will be, and that means more money saved every month.

Let’s use these numbers for an example:

740 credit score, $200,000 loan value, 30 year term, 4.00% interest rate = $954.83/month

680 credit score, $200,000 loan value, 30 year term, 4.250% interest rate = $983.88/month
With a 680 credit score, you would be paying $29.05 more each month. For a 30 year term, that equals $10,458! You can takeaway two perspectives from this scenario. For one, on a mortgage payment of this price, an extra $29 really isn’t that much, so don’t feel too bad if you don’t have time to improve your credit. On the other hand, if you have good credit, or time to improve it, you could be saving an extra $29 per month; that’s a Netflix, Spotify, and your favorite magazine subscription every month!

There are several factors which make up a mortgage application, whether or not credit is the most valuable is truly dependent on your situation, and what aspects you’re strongest in.

If you have further questions or would like to talk about refinancing or buying a home, reach out to me.  
Maverick Johnston 
509-230-0768
NMLS ID #1668965

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