How Important is Your Credit Score When Getting a Mortgage?
Your credit score can impact every aspect of your mortgage loan. Here's why lenders focus on your credit score and why it's important when borrowing.
As you gear up to purchase a home, you have a ton of financial planning and consideration to undergo. One of the most important factors to consider when applying for a mortgage loan is your credit score.
Your credit score can impact every aspect of your mortgage loan, and it’s critical to understand exactly how, and ways you can ensure your credit score stays strong before you even shop around for lenders.
Why Does My Credit Score Matter When Getting a Mortgage?
Your credit score is an imperative indicator of your financial stability when borrowing from any institution. By establishing good credit, you’re directly demonstrating to lenders that you’re able to pay back what you’ve borrowed in a timely manner.
When it comes to securing a mortgage loan, lenders consider issuing this loan to be a risk — no matter what. By having a good credit score, you can help their evaluations because you’ve demonstrated your risk is lower than someone with poor credit.
What Do Mortgage Lenders Look for in a Credit Score?
When you apply for a mortgage loan, mortgage lenders will review your credit history and credit score. 90% of lenders use the FICO® score to measure how eligible you are to borrow from them, as well as the terms of your mortgage loan.
FICO® scores are calculated using multiple pieces of data from your credit history, aggregated into five distinct categories:
- 30%: Amounts owed — How much you owe against what you’ve borrowed, also known as debt.
- 35%: Payment history — How many payments you’ve made, at what frequency, and at what amounts, including missed or late payments.
- 15%: Length of credit history — The duration of time you’ve used credit, or borrowed.
- 10%: New credit — When you open a new line of credit, or start borrowing, your credit score is impacted for 2 years to allow you to establish stability in repaying this debt.
- 10%: Credit mix — The amount of credit lines you have open, as well as the amount you’ve borrowed across all sources.
All of these categories add up to your FICO® score, a three-digit score allowing lenders to determine your likelihood of repaying a loan. FICO® scores are weighted in a range from 580 or less to 800 or more. Essentially, the lower you score, the poorer your credit is. The higher you score, the better your credit is.
Conventional mortgages typically require a credit score of at least 620; anything lower than this shows mortgage lenders you’re a high risk for a mortgage loan. Ideally, a credit score of 740 or above demonstrates you to be a strong, lower-risk candidate to lend to.
Having a strong credit score also allows you greater options of possibly securing lower down payments, lower private mortgage insurance (PMI) payments, as well as better interest rates. These perks aren’t offered to individuals who are higher-risk, with lower credit scores.
Clearly, your credit score is massively important when applying for and securing a mortgage loan as it determines your ability to get approved, the terms and conditions of the loan, and your overall buying power.
What Can I Do to Improve My Credit Score Before Applying for a Mortgage Loan?
Preparation goes a long way before you even consider taking out a mortgage loan. It’s also a great idea to have strong credit no matter what, as it impacts other important loans you need to take out.
To help improve your credit score, you can take the following actions:
- Make your payments on time (if not early): Late payments can not only cause you to incur and have to pay late fees, they can also negatively impact your credit.
- Reduce your overall debt owed: If you have multiple credit cards open, or have multiple loans, or both, work to reduce your overall debt you owe across institutions. This can increase your credit score, reduce your monthly payment burden, and translate into a smoother path to homeownership in the long run.
- Keep an eye on your credit score: It’s a good idea to stay aware of your credit score. You can do this by requesting a credit report directly from a credit reporting agency, or through a secure and authorized agency for consumer credit reporting. Doing this from time to time can help you stay on top of any debts you may have missed, as well as allow you to measure the impact of your payments or other credit-related activities, like taking out a new loan.
- Don’t open too many credit accounts: Don’t try and broaden your credit mix artificially, only borrow what you absolutely need to, and make sure to make regular payments. Opening a variety of credit accounts or taking out multiple loans can damage your credit score, so stick to what you truly need.
If you have more questions about how your credit score can impact your home search and buying journey, it’s best to work with a professional, established real estate agent.
You can easily connect with a top real estate pro in your area today by reaching out on RealEstateAgents.com. Professional real estate agents have deep expertise working with a variety of buyers, regardless of credit score, and can help you navigate the process with ease.
