What You'll Learn
- Your credit plays a significant role in qualifying for a mortgage
- The higher your credit score, the better your mortgage terms
- Paying your bills on time is critical to having good credit
If you’re thinking about buying a home, you need to be aware of your credit score – one of the most important factors when qualifying for a loan. Generally speaking, a higher score can mean a better chance of getting approved for a loan and securing a lower interest rate.
Your Credit Report
Your credit report is a record of money you've borrowed, your history of paying it back and how much open credit is available to you. Lenders rely heavily on the information in your credit report as it signifies your creditworthiness and the likelihood that you'll repay your mortgage.
The following appears on your credit report:
- A list of debts and a history of how you've paid them, including credit cards, car loans and student loans.
- Any bills referred to a collection agency, such as utility or medical bills that you did not pay or paid significantly late.
- Public-record information, such as tax liens and bankruptcies that may be linked to you.
- Inquiries made about your creditworthiness, showing how many inquiries were made about your credit and if you were given credit based on the inquiry.
Your Credit Score
Your credit score helps lenders decide how likely you are to repay your debts and plays a significant role when securing a mortgage. Scores range from 300 – 850 points and are based on:
- Your payment history and ability to repay your debts on time. Late payments will lower your credit score.
- The amount of total debt you owe, including credit cards, student loans and car loans.If your credit cards are at their limits, this can lower your credit score - even if the amount you owe isn't large.
- How long you've used credit and how you’ve managed it. If you show a pattern of managing your credit wisely, keeping credit card balances low and paying your bills on time, your credit score will be positively affected.
- How often you apply for new credit and take on new debt. If you've applied for several credit cards at the same time, your credit score can go down.
- The types of credit you currently use, including credit cards, retail accounts, installment loans, finance company accounts and mortgages.
Generally, the higher your credit score the more options will be available to you, including a lower interest rate.
The average credit score is 725. If your score is below 725, you can still get a loan, however you will not have as many options and your rate will be higher. If your score is in the low 600s, we encourage you to reach out to a Housing Counselor today to start rebuilding your credit.
3 Tips to Improve Your Credit
The most favorable mortgage terms are given to those with the strongest credit
You’ll damage your credit if you don’t pay your bills on time and/or keep high credit card balances
You’ll have a hard time securing a loan if you have a credit score below 650