A whopping 90% of lenders use your credit score to both determine if you are eligible for a mortgage and set the terms, so it is clearly important. Being informed about the implications of your credit score is also worth a lot of money. Literally, it could save you thousands of dollars. You will pay more over the course of the loan if you don’t get as favorable a rate. So, start early and get your credit together by becoming an expert on the subject.
This article will go over the key things that keep mortgage rates low. We’ll look at components of your credit score like payment history, credit utilization, and length of credit history — all things that give you the best rates. Expect practical advice. Today you can make some important decisions about your financial future, and credit, that one day will guide you to the home of your dreams.
Understanding Credit Scores
A credit score, a number that ranges from a low of 300 to a high of 850, is your financial report card that shows lenders how risky it is to lend you money and extend credit to you. The higher the score, the better — the more likely that someone will get approved for loans, credit cards, and the lower (or more favourable) interest rates.
The score is computed by factoring in your payment history (35% of the score), credit utilization (30%), the length of your credit report (15%), the types of credit (10%), new credit inquiries (10%).
If you want to get a mortgage — get financed for a home — you need a good credit score. The reason is this score determines the terms and whether you get the mortgage. Lenders tend to look for a credit score of 620 or above for conventional loans. If your score is in the 700s, that's even better.
The Impact of Credit Scores on Mortgage Terms
Mortgage lenders set credit score qualifications to ensure that a borrower will be able to qualify for the loan. But if they do qualify, a higher score also makes it possible for a borrower to get a larger home loan and a better mortgage term, so maintaining the best credit score possible is to your advantage.
Tips for Improving Your Credit Score
If you’d like to buy a home, you’ll want to maintain a strong credit score. Your payment history can have a huge effect on your credit. That’s because whether or not you’ve paid your bills on time makes up 35% of your score. Late payments can mean you’ll pay a fee. They can also appear as a black mark on your credit reports. Think about setting up automatic payments—or at least regular reminders—so you’ll remember to pay your bills.
Next, aim to reduce the amount of overall debt you have. As a future homeowner, you may wish to pay down credit card balances. You may also want to avoid taking on any new large sources of debt before you apply for a home loan. Additionally, you’ll want to keep your credit utilization ratio—a measurement of the amount of debt you have to your overall credit limit.
Finally, consider using the tools and resources you have available to you. Many people use credit monitoring services. Once per year, you’re also eligible to receive a free credit report from every reporting agency. Use these tools to your advantage. Read your credit reports to understand your credit score, what’s on your reports, and how you can improve your financial situation, so you’re better equipped to buy your home.