What Homebuyers Need To Know About Credit Scores
If you're considering purchasing a home, you should be aware that getting approved for a mortgage depends heavily on your credit score. Lenders look at your credit history to determine, among other things, whether you can pay your bills on time and repay loans. It also contributes to the calculation of your mortgage rate. According to a Bankrate article:
“Your credit score is one of the most important factors lenders consider when you apply for a mortgage. Not just to qualify for the loan itself, but for the conditions: Typically, the higher your score, the lower the interest rates and better terms you’ll qualify for.”
Due to the fact that mortgage rates are a major determinant of affordability, particularly in today's market, your credit score may feel even more significant to your intentions to purchase a home at this time. The Federal Reserve Bank of New York reports that a mortgage applicant's median credit score in the United States is 765. However, this does not imply that your credit score must be flawless. In general, the following Business Insider article shows how your FICO score range can matter:
“. . . you don't need a perfect credit score to buy a house. . . . Aiming to get your credit score in the ‘Good’ range (670 to 739) would be a great start towards qualifying for a mortgage. But if you're wanting to qualify for the lowest rates, try to get your score within the ‘Very Good’ range (740 to 799).”
The best approach to learn more about how your credit score may affect your home loan and the mortgage rate you can get is to speak with a reputable lender. As per FICO:
“While many lenders use credit scores like FICO Scores to help them make lending decisions, each lender has its own strategy, including the level of risk it finds acceptable. There is no single "cutoff score" used by all lenders and there are many additional factors that lenders may use to determine your actual interest rates.”
Experian lists a few areas you might want to concentrate on if you're trying to raise your score:
- Your Payment History: Late payments can have a negative impact by dropping your score. Focus on making payments on time and paying any existing late charges quickly.
- Your Debt Amount (relative to your credit limits): When it comes to your available credit amount, the less you’re using, the better. Focus on keeping this number as low as possible.
- Credit Applications: If you’re looking to buy, don’t apply for other credit. When you apply for new credit, it could result in a hard inquiry on your credit that drops your score.
A lender will be able to determine which range your score falls in when you're ready to begin the home-buying process and provide you with more information on the intricacies of each loan type once you've decided to do so.
To sum up
Given the current struggles with affordability, giving your credit score some priority may help you get a better mortgage rate. Let's talk if you want to find out more.