Importance of Credit Score in Home Buying Process.

A credit score has a direct correlation on your financial status. The higher your credit score lowers the risk of your loan being rejected. Credit score determines how worthful you are for a lender to decide if you are qualified to obtain a loan. The entire credit history of a borrower is fundamental in determining the creditworthiness of the borrower. Knowing the importance of credit score is the first important factor to be aware of before you decide to apply for a loan to buy a house. The credit score helps to determine the interest rate. 

If you do not have a bad credit history, then the lenders will see you as a low- risk investment and will offer you an interest rate that is as low as possible. If you have a bad credit history, then there is a maximum possibility for lenders to see you as a risky investment. And even if they approve your loan, there is a possibility to higher your interest rate. 

How lenders view your Credit Score?

Your Credit Score is a number that represents your credit profile. Various credit models have certain factors that look at how you have used your credit cards, loans, etc. lenders will decide to loan you money with as less interest as possible only if your credit score is high, otherwise there are many possibilities of your loan either being rejected or keeping the interest rate really high. 

The minimum credit score you need to buy a house in 2020 is 620, though some lenders will go down till 580 or below. But there are the least possibilities that the lender would consider you if your credit score is 500 or below. If you have a bad credit score, you might still be able to buy a house using a conventional fixed-rate mortgage if you have bad credit, but only at a higher interest rate and with added fees. The end result is that a bad credit score will cost you more money each month and over the life of the loan. 

The CIBIL score ranges between 300 and 900. The closer the score is to 900, the better it is considered. While score between 300 and 549 is considered poor, anything from 550 and 700 is considered fair. A score belonging to either category can be improved. 

How to improve Bad Credit?

Your credit score is never constant for your life, it might keep changing either way. If you have a bad credit score, there are ways to improve it by taking a deep look at your financial habits. 

Few tips to improve your credit score:

• Pay your bills on time and be disciplined with credit. 
• Pay off Debt and keep balances low on credit cards and other revolving credits.
• Apply for a new credit account. 
• Never close unused credit cards.
• Avoid taking too much debt at one time.
• Customize your credit limit.
• Opt for a longer tenor when you take a loan.
• Check your CIBIL report for mistakes and rectify them.
• Create a credit history by choosing different forms of credit.
• Don’t increase your credit limit.
• Make sure all your old loans are closed.
• Keep your credit report error-free.

These are some habits that you can adopt into your life to improve your credit score over time. However, it is important to keep in mind that the above steps will not immediately affect the change in your score. It will take around 6 months to a year to improve your credit score. 

A few more home buying tips

If you are in the process of choosing a lender and getting prequalified for a mortgage loan to buy a house, there are several things you can do to begin the process right away:

Gather your financial documents: 

It is very important to have an entire knowledge of the documents that are required in the entire home buying process. Make a list of all the documents that you should gather and have them ready to go. 

Consider using a co-signer for the loan:

If your credit score is bad and if you still want to have access to decent mortgage rates, you can consider a co-signer. Co-signers are those who can help borrowers with a low credit score or bad credit history increase the chances of loan approval.

Also, if you do not have a credit card or a credit history, then you will not have a credit score and will be considered as new to credit. As the score cannot be generated in this case, lenders will look at other factors like employment and income to determine their repayment capacity. Having a good credit history can make your life easier, giving you a better chance of qualifying for loans or credit cards.