One of the top factors that will make or break your mortgage approval is your credit score. To find out why your credit score matters, what kind of score you need, and how to build your credit to qualify for a mortgage, keep reading.
What is a credit score?
Your credit score is a three digit number between 300 and 850 that reflects how well you handle debt. There are three credit reporting agencies in the US: Equifax, TransUnion, and Experian. When you apply for a new credit account, the potential lender will contact at least one of these agencies to find out how much credit you are using and how often you are making payments, reflected in your credit score.
The calculation models that determine your credit score take into account factors like these:
- The number of credit accounts you have open
- The type of credit you have
- Your utilization rate (the balance you carry as a percentage of your maximum, e.g. a 25% utilization rate if you carry a $250 balance on a card with a $1000 maximum)
- How long you have had credit
- You payment history
Why do lenders care about your credit score?
Lenders use your credit score to find out how responsible and capable you are when it comes to handling finances. All mortgages represent risk for the lender, and it is the job of a loan officer and mortgage underwriters to determine whether an applicant is a “good risk.” One of the ways to determine this is by looking at the applicant’s credit score.
A high credit score gives the lender confidence that you as the applicant are likely to manage your debt payments responsibly because you have a track record that shows you take on a reasonable amount of debt and make sure to pay what you owe on time. On the other hand, a low credit score presents the impression that you are a risky applicant, even if you are sure that isn’t the case.
What counts as good credit?
In general, we recommend applying for a mortgage if you have a credit score of 620 or above. Credit scores are divided into tiers, so it’s more significant to know which tier you fall under than the exact number of your credit score. In general, credit scores under 579 are poor, 580-669 are fair, 670-739 are good, 740-799 are very good, and 800-850 are excellent.
Aim for good, very good, or excellent credit before applying for a mortgage. Your mortgage rates and terms will be more favorable the higher your credit score.
How can you build your credit?
If your credit score is not exactly where you want it to be in order to apply for a loan, don’t worry. There are plenty of ways to raise your credit score, and you can do this in a relatively short amount of time with the right strategy. What you need is an understanding of what types of financial decisions and actions impact your credit score so you can personalize a plan that will best fit your situation.
Some of the ways you can raise your credit score include:
- Lowering utilization rates on credit cards: If any of your cards are over a 50% utilization rate, focus on those first. Aim to bring your balance under a 50%, or better yet 25%, utilization rate. You may also be able to ask for a higher credit limit, which will immediately change your utilization rate.
- Make on time payments: If you struggle to make payments on time, consider setting up an autopay on your debts.
- Add a new type of account: Lenders want to see a variety of types of credit accounts and how you manage them. If you only have credit cards, consider opening a credit-builder loan and managing it impeccably.
To find out more about qualifying for a mortgage, talk to one of our loan officers today!
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