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Your Credit Score Matters When it comes to buying a home, the importance of good credit cannot be overstated. It's the first thing a lender will check and the results will have tremendous impact on the quality of the loan you get. Your credit score will either make or break your opportunity to get a home mortgage you can live with. A quality, conservative loan with good terms can make the difference between your thriving in your new home or breaking under the pressure of a tough loan that drains your bank account month after month. My dad always used to say, 'The most important thing is to be able to pay your mortgage.' The credit scoring system is impersonal and does not factor individual situations. The system simply quantifies the likelihood that a consumer will pay his/her debt without being more than 90 days late at any point in time in the future. Sounds easy, doesn't it? Just like in school, you get a grade for your performance and just like in school, you want a high score. The higher your credit score, the less you will pay to borrow money. You see, anybody can get a loan. The real question is how good is that loan? Credit scores range between 300 and 900. Lenders consider a score of 740 or above to be very good and they reward, in a big way, people with that score. The Bottom Line: The amount of money you will pay in interest over the life of the loan will be directly impacted by your credit score. Hypothetically speaking, let's look at what your credit score will impact a loan amount of $250,000 over a 30-year fixed period, with the following scenarios: A credit score of 720 will get you an APR of 5.71%, a monthly payment of $1,453 and an interest paid total of $272,928. A credit score of 620-719 will get you an APR of 5.8% to 7.84%, a monthly payment of between $1,446 to $1,807 and an interest paid total of $277,845 to $400,381. A credit score below 620 will get you an APR of 8.45% to 9.25%, a monthly payment of between $1,914 to $2,054 and an interest paid total between $438,957 to $489,365. It is imperative that you understand 2 things: Lenders will give anyone who breathes a loan. The real question is, 'Is it a good loan?' The difference in interest payments between a good loan and a bad loan can be nearly two times. That's why a good loan can make the difference between making your payments and not. So, a good credit score is the key to a good loan and a good loan is the key to the lowest amount of interest you will pay over the life of the loan. A good loan could also be the key to your ability to make your mortgage payments. Remember, those mortgage payments need to be paid month in-month out regardless of the bumps in the road of life we all experience. You owe it to yourself to take a few months to clean up your credit in order to cast your credit in the best of all possible lights. You will be paying that mortgage for a long time and the lowest payment possible is essential to your family's financial well-being. The 5 Factors of Credit Scoring: There are 5 components that go into creating your credit score, they are: 1. Payment History'35%. Paying debt on time and in full has the greatest positive impact on your credit score. Delinquencies that have occurred over the last 2 years have more negative impact than those occurring prior to that time. 2. Outstanding Credit Balances'30%. The lender looks closely at the ratio between outstanding balance and available credit. Ideally, you want your balances as close to $0 as possible. You definitely don't want outstanding balances to exceed 30% of available credit when you are trying to buy a home. 3. Credit History'15%. Indicates the length of time since a specific line of credit was established. Seasoned borrowers benefit here. 4. Type of Credit'10%. A mix of car loans, credit cards and mortgages is preferable to credit card debt only. 5. Inquiries'10%. Your credit score will quantify how many inquiries have been made on your credit in the last 6 months. Each inquiry can reduce your credit score by 2 to 25 points. It is important to note that you can run a credit score on yourself without any depletion of your score. Improve Your Credit Score Today: Step 1: Order Your Credit Reports & Scores: Request your credit score from all 3 credit bureaus: Transunion, Equifax and Experian. Lenders will pull from all 3, you need to see what they are seeing. Step 2: Verify the Data Being Reported: Make sure that the data being reported is true and correct. Step 3: Dispute the Inaccurately Reported Information: Contact your creditors and send letters of dispute to the credit bureaus to have errors on your credit report corrected. By law, they have to handle the problem within 30 days of receiving your letter.
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