How Your Credit Score Affects Your Ability to get a Mortgage Loan
Your credit score, as well as the information on your credit report, are key ingredients in determining whether you’ll be able to get a mortgage, and the rate you’ll pay. When you apply for a mortgage loan, your lender will pull your credit report to determine your creditworthiness and your debt-to-income ratio to see if you are financially responsible. This also helps them to determine what loan amount you can afford and at what rate of interest to approve you at. The better credit you have, the higher loan amount you'll likely qualify for, and at a lower interest rate.
Lender Scoring Methods
While different lenders will use different qualifications and scoring methods to determine your creditworthiness, some variation of the standard FICO score is often used as a base. FICO takes different variables on your credit report from the three major credit bureaus (Equifax, Experian and TransUnion) to compile your score. Those range from 300 – 850. From this information, they typically compile a score based on the following factors:
Getting your Credit Score
In order to raise your credit score, you must obtain the credit reports that are used to build it. Fair Isaac, the corporation that invented the first FICO credit score, offers FICO scores on myFICO.com. It's inexpensive, fast, and easy to get your credit score as well as credit reports from all three credit reporting agencies. Also available are information and tools that can help you analyze what actions might have the greatest impact on your FICO score.
You can get a free credit report every year from the three major credit reporting agencies when you visit AnnualCreditReport.com. These reports do not include a free credit score, but it's very inexpensive to get one at the same time. You can also sign up for free credit reporting services such as Credit Karma. This will show you your credit report history, but it may not be specifically narrowed down to what a lender might be looking for. Regardless, it provides you the opportunity to review your credit history and start making corrections if needed.
Tips to Improve your Credit
Lender Scoring Methods
While different lenders will use different qualifications and scoring methods to determine your creditworthiness, some variation of the standard FICO score is often used as a base. FICO takes different variables on your credit report from the three major credit bureaus (Equifax, Experian and TransUnion) to compile your score. Those range from 300 – 850. From this information, they typically compile a score based on the following factors:
- Credit History - How long have you had credit?
- Late Payments - Do you have a history of late payments?
- Your Credit Card Balances - How many credit card accounts do you have, and how much do you owe on them.
- Requests for Credit - How many times have you had your credit checked for a loan?
In order to raise your credit score, you must obtain the credit reports that are used to build it. Fair Isaac, the corporation that invented the first FICO credit score, offers FICO scores on myFICO.com. It's inexpensive, fast, and easy to get your credit score as well as credit reports from all three credit reporting agencies. Also available are information and tools that can help you analyze what actions might have the greatest impact on your FICO score.
You can get a free credit report every year from the three major credit reporting agencies when you visit AnnualCreditReport.com. These reports do not include a free credit score, but it's very inexpensive to get one at the same time. You can also sign up for free credit reporting services such as Credit Karma. This will show you your credit report history, but it may not be specifically narrowed down to what a lender might be looking for. Regardless, it provides you the opportunity to review your credit history and start making corrections if needed.
Tips to Improve your Credit
- Don’t apply for a lot of new credit in a short time, especially if you are getting ready to get a mortgage. Doing so may negatively affect your score.
- Errors on your credit report can reduce your score artificially – which could mean a higher interest rate and less money in your pocket – so it is important to check your credit report and correct any errors well before you apply for a loan.
- If you’re bad about paying your bills, or paying them on time, it damages your credit and hurts your credit score. Make sure your bills are being paid on time, every time.
- Eliminate small balances you may have on numerous credit cards. Gather up all those credit cards with small balances and pay them off, then select one or two go-to cards that you can use for everything.
Now that you know what lenders are looking for when it comes to your credit history, and how you can be proactive on making sure your credit is loan approval ready, time to check those reports and start your journey! If you're in need of a mortgage for a new home, or have any other questions pertaining to mortgage lending, trust in the mortgage professionals at MHQ - Mortgage HeadQuarters to have your best interest in mind. We can help you choose a mortgage program that's right for you and your specific needs!
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