A home mortgage loan is likely the biggest financial investment a consumer will make in a lifetime. With the tough economic times and the recent history of mortgage loan crisis across the country, mortgage lenders are no longer taking application information for granted when you apply for a home loan. Every detail of your financial history is now being analyzed and set up against the highest of standards.
The criteria for getting a home mortgage loan are much stricter than ever. This means applications must contain what the lenders want to see in order for them to feel there is little risk involved in loaning you such a large amount of cash. If there is data on your application or credit report that makes a lender think twice, you are at risk for being denied the loan.
If you barely pass inspection for an acceptable financial profile, the lender may be willing to loan you the money necessary for a home purchase but they will do so at significantly higher rates and even stricter terms than consumers with better credit will need to pay. In other words, you may get the loan, but you are going to pay for it for the rest of your life.
A Few Points Does Matter
When you apply for a mortgage loan, the lender will order a credit check that includes your score. Since lending standards have tightened, your credit score will need to fall in the good to excellent categories if you want approval at the best interest rates. Make no mistake that a few points in APR can make a big difference in how much you pay over the life of a loan.
As an example of just how much you can save over the lifetime of a loan, here are some numbers to show your potential extra expenses if applying for a loan with a credit score under the lender’s standards:
Loan Amount: $250,000 at 5% fixed interest rate for 30 years gives you a monthly mortgage payment of $1,476.26. Total amount of interest paid over the course of the loan equals $256,453,41 for a grand total of $506,453.41
Loan Amount: $250,000 at 7% fixed interest rate for 30 years gives you a monthly mortgage payment of $1,829.58. Total amount of interest paid over the course of the loan equals $383,649.47 for a grand total of $633,649.47.
Total amount of savings with a 2% APR difference equals $127,196.06.
Imagine what you can do with extra hundred thousand dollars in the bank.
Trick to Improving APR
The only real trick there is to getting the best options in mortgage products and interest rate is your ability to work on improving your credit prior to applying for your home loan. Good credit is a factor in many financial decisions these days, even for industries outside financial sectors. Insurance companies, landlords, and even cell phone providers will check your credit before agreeing to offer you services or provide you with products. Negative credit information from your past can haunt you for up to seven years, even longer with a bankruptcy on your record. In order to increase your credit score, you’ll need to know first where you stand by ordering copies of your credit reports and paying for your credit score.
Review the details contained in your credit profile and be sure to dispute an inaccurate piece of information with the credit bureaus and your creditors. Up to 80% of the nation’s consumer credit reports contain at least one mistake. These errors can result in a lower credit score than you deserve.
In addition to checking in on your past, you need to watch how you handle your financials in the present time. Be sure to pay all of your bills on time each month and don’t overextend your credit limits. While you can’t erase what you’ve done before, you can work towards a much better report in just a few months.
What is crucial to remember is that if you are considering a home loan in the near future, you need to start making some headway now because there are no overnight fixes for bad credit. It takes time, follow up and follow through in order to score a better credit profile. Don’t wait until the last minute to care about your credit. Make it a priority on your monthly list of money to-dos.
J.D. Roberts 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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