Credit and Home Buying - Like Peas
and Carrots
by Brandon Cornett
In the classic film Forrest
Gump, Tom Hank's character
said that "Jenny and me was like
peas and carrots," referring to
how inseparable they were when
growing up in Greenbow, Alabama.
Borrowing that analogy from Forrest,
home buying and credit scores are
like peas and carrots too. The two
concepts are inseparable, so anyone
planning to buy a home in the near
future must understand the importance
of credit.
The Credit and Mortgage Connection
For most people, purchasing a home
means taking out a mortgage loan
to pay for it. Unless, of course,
you've just inherited a fortune from
Uncle Ernie, won the lottery, or
invested in Apple Computers stock
back in the 1980's. If you fall into
one of those categories, count yourself
lucky.
But for the rest
of us "average
folks," buying a new home is only
possible through the use of a mortgage
loan. And this is where credit comes
into the picture.
To obtain a home
loan, you must have a credit history
behind you
(and ideally a good one). Lenders
will review your financial background
to "weigh" you in terms of risk:
- If you have a history of being
financially responsible, then you'll
have a higher credit score and
will be more likely to get a good
interest rate on your home loan.
You are a low-risk borrower for
the lender.
- On the other hand, if you have
a history of missing bill payments,
carrying too much debt, or similar
examples of bad financial management,
you will have a lower credit score.
In this scenario, it will be harder
to obtain a loan for home buying
purposes, and even if you do you'll
pay a higher interest rate on the
loan.
The two points outlined above have
always been true. But good credit
is even more important for home buyers
today, due to tighter regulations
on the lending industry. So let's
talk about the things you can do
to maintain a higher score:
Credit Score Needed to Buy a
Home
What kind of score do you need for
home buying in today's economy? Well,
this will partly depend on the lender
you choose. But suffice to say that
a better score will certainly make
your home buying process a lot easier.
Not only will you have an easier
time qualifying for a loan, but you'll
also qualify for a better interest
rate on that loan. This translates
into money saved each month!
The average credit score in the
United States currently falls between
650 and 700, depending on whom you
ask. Higher is always better. According
to experts, a score of 720 or above
is ideal for home buying purposes
because it will ensure that (A) you
get qualified for a mortgage loan
in the first place and (B) you get
a good interest rate on the loan.
Carrots and Peas ... Like Never
Before
Good credit is more important for
home buyers today than it was in
the past. That's because in the past,
there were plenty of subprime lenders
willing to offer home loans to borrowers
with bad credit scores. Of course,
they would charge them astronomically
high interest rates on the loans,
which is partly what led to the mortgage
crisis of 2007 - 2008.
As a direct result of that crisis,
there are very few subprime lenders
around anymore. That particular business
model is simply not viable anymore.
So while there were plenty of subprime
(bad credit) mortgages in the past,
they simply aren't around anymore.
About the Author: Brandon
Cornett publishes a website full
of mortgage
loan advice as well as several
other websites for consumers. Visit
the author online at http://www.mortgage-refinance-advice.com/blog/