3 Reasons Aspiring Homeowners Should Repair Their Credit

If you've been dreaming of leaving the renting life behind and embarking on the adventure that is owning your own home, you're in great company. But that company is also why it's a competitive market out there, so before you so much as look at a random home listing online, you should be preparing your life and your finances for this substantial change.

Saving a down payment is a huge undertaking these days, but beyond that, you also need reasonable credit (note that I didn't say you needed perfect credit). It can take years to achieve this, especially if you've had a crash-and-burn style life catastrophe get in your way. Medical bills, car accidents, and being out of work for sustained periods can do huge damage to your credit -- but it's not forever. You can fix those problems and return your credit to its former glory.

It's time to get started repairing your credit, and here are three reasons why it matters.

1. You'll be offered lower mortgage interest rates

Yep, you heard it here first, or maybe second or third, but the most important and obvious reason to repair your credit before even thinking about buying a home is that you'll pay less in interest for the life of your mortgage.

The Consumer Finance Protection Bureau (CFPB) has a neat tool that can allow you to estimate your mortgage interest rate based on your location, credit score, and other elements of your future loan, like purchase price and down payment.

For example, if you're a Missouri resident with a 620 credit score looking to buy a $350,000 home with 10% down using a 30-year fixed rate mortgage, you can expect to see a 7.750% interest rate as of May 29, 2024. On the other hand, if your score is 780 or higher, your rate will be 7.125%.

The CFPB estimates that over the first five years, the higher rate will cost you nearly $10,000 more; over 30 years, that cost goes up to $48,415.

2. Your mortgage insurance may be cheaper

Here's a dirty little secret many lenders may not tell you: Your private mortgage insurance is "private" because it's underwritten by a private company, and because of that, your credit score is taken into account when the rate is determined.

One of the major companies that offers this insurance, MGIC, publishes its pricing tables for borrower-paid monthly premiums, which is the portion of the mortgage insurance you'll pay monthly. If your loan-to-value ratio is 95%, as it is for many first-time buyers, you can expect to pay significantly different rates based on your credit score.

With a 620 credit score, you'll be paying 1.42% of your monthly payment in mortgage insurance premiums; with a 700 credit score, you'll pay close to half, just 0.78%.

3. Your homeowners insurance premiums could be lower

This one is far less of a guarantee, since there are a lot of external factors that go into homeowners insurance premiums. For example, if you buy a house in an area prone to tornadoes, it may not matter how good your credit is; the premiums will be pretty high.

But in many states, credit scores are still part of the homeowners insurance premium calculation, which means that the better your score is, the better your rate will be. Even if you escrow your insurance, the company still wants to know that without that escrow, you'd be willing and able to make your payments on time.

This will also apply if you're interested in additional insurance for hazards that are common in your area, but for which coverage isn't required, like wildfire insurance or additional wind coverage. So you may save on multiple different insurance policies with a better credit score.

Improving your credit score will make housing more affordable

Part of the reason we buy our houses is to create homes where our families can grow and explore with a great deal of security. But another part of it, if we're being honest, is to help control the cost of housing as much as we can.

Although costs like taxes and homeowners insurance are always in flux, you can more easily budget for a house payment that's lower due to the work you've done to improve your credit over time. It's tempting to rush in, and it's easy to dismiss a fraction of a percent change in your mortgage rate, but remember that everything flows from that credit score, so the costs can really add up.