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What Recent Credit Score Changes Mean For Home Buyers

Credit Score Changes

It is very important for you to keep an eye on your credit score, credit report, and any credit score changes by the top credit bureaus. Your credit is the single most important factor in determining how much you pay for a home loan. Don’t believe us? Let us prove it to you very briefly:

Someone with a 740 credit score buying a $250,000 single family home with 20% down payment would qualify for a 30-year fixed rate mortgage at an interest rate of 4.125%. The monthly payment (principal and interest only – not including taxes and mortgage insurance) at this rate would come out to $969 per month.

Someone buying the same home with the same percentage of down payment but with a credit score of 640 would qualify for the same 30-year fixed rate mortgage at an interest rate of 4.625%, increasing the monthly payment to $1,028 per month. That’s almost $720 more per year or $7,200 over a 10-year period, not taking into account the time value of money.

Now that we’ve made this very important point, and hopefully convinced you about the importance of improving your credit score, we’re happy to tell you that there is good news on the credit horizon:

The leading credit scoring company – the Fair-Isaac Corporation (known as FICO) – has made important changes to its credit score model that could result in higher credit scores for millions of consumers. The new credit score computations will change in two important ways:

  1. Medical bills will no longer be weighed as heavily as it did in previous versions of FICO’s credit score model.
  2. Any collections that have already been paid will be ignored.

Considering that medical bills account for about half of all unpaid collections, this is certainly nothing to sneeze at. However, before we all get too excited about this great news and what this means for home buyers, we must still wait for these new rules to go into effect and we must also wait for mortgage lenders to adopt these new credit standards (something they have been slow to do in the past, and some will even opt out of adopting new models).

The important thing to keep in mind is that – even though credit score changes are made from time to time – taking control of your credit is always a good idea. I can guarantee that using credit responsibly and paying your bills on time will always lead to higher credit scores and therefore lower interest rates on most loans you take out, including your mortgage.

Oh, and don’t forget to check your credit for mistakes; you would be surprised how many times people find errors on their credit report. Make sure to check out our ultimate mortgage calculator and other tools for first-time home buyers.

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