It’s no secret that credit scores are a huge factor when buying a new home, because your credit score affects the interest rate you get on your mortgage. Given the size of home loans, a few points on your credit score can mean a higher rate, which in turn adds up to thousands of dollars over the life of the loan.
So where should you begin?
The first step is understanding how credit works. WalletHub.com has an excellent article on credit scores and how the scale is calculated. You can view that information here to get a good foundation of how credit works.
Mortgages are not the only expense associated with buying a new home. Pretty much everyone takes out homeowners insurance, which can add nearly $100 or so to your monthly payments. And yes, you can be charged more in insurance premiums if you have a subpar credit score (here’s an explanation of what qualifies as a “good” credit score).
Across the U.S., a homeowner might pay 32% more in annual homeowners insurance premiums if they have fair credit, as opposed to excellent credit, according to a survey from InsuranceQuotes.com. If you have poor credit, your homeowner’s insurance can cost twice as much as it would if you had excellent credit. Most states allow insurance underwriters to consider credit history when determining home insurance premiums, though California, Maryland and Massachusetts do not. In 38 states, plus Washington, D.C., people with poor credit pay, on average, twice as much for homeowners insurance as they would if they had excellent credit.
“It’s hard to fathom that bad credit would justify such steep rates on homeowners insurance, but it often is a factor and clearly can be an important one,” said Gerri Detweiler, Credit.com’s director of consumer education. “When I bought my current home a number of years ago I was told I didn’t get the largest discount for my homeowner’s insurance due to my credit score, even though I had very little debt and a clean payment history. So I can relate to homeowners who are really frustrated by this practice.”
Insurance underwriters generally use credit-based insurance scores, according to the report from InsuranceQuotes.com, and those scores are based on credit report data like outstanding debt, length of credit history, late payments, collection accounts, bankruptcy and credit applications.
There are many expenses that come with being a homeowner, so anything you can do to keep the costs down will likely add up to a lot of savings in the long run. If you didn’t get the lowest rates, consider asking your insurer to reassess your premium after you’ve had time to improve your credit after buying a home. You could also shop around for a new policy as a money-saving tactic, because underwriting practices vary by insurer.