A good credit score is the standard by which most lenders decide whether you’re eligible for a home. Your credit score is based on your credit report, which details your financial history – your debt, payment record, and the variety of credit you use.
Your credit score is a number that ranges from 300 and 900. A score above 700 means you manage your credit well, which makes you a good candidate for a loan. The lower the credit score, the greater the risk the lander assumes. All of which means you might have to pay a higher mortgage rate.
Mortgage lenders use your FICO (Fair Isaac Corporation) score to determine creditworthiness. Your score will help the lenders calculate the interest rate you’ll pay to get your mortgage. Here’s the weight lenders attach to each component of your FICO score:
- Credit history – 35%
- The amount you owe – 30%
- The number of new credit you open – 10%
- Length of credit history – 15%
- Credit mix – 10%
Improve your credit score before you apply for a loan mortgage, so you can save a lot of money. Here’s how to do it:
- Check your credit reports
It’s important to know where you currently stand by knowing your history. You can acquire your credit report from each of the three major national credit bureaus: Equifax, Experian, and TransUnion. Access a copy of your report for free once a year through AnnualCreditReport.com. By combing through these reports thoroughly, you can see what is hurting or helping your credit score.
- Check your credit report for errors
After viewing your credit report, double-check to see if there are any errors. A single late payment correction can increase your score by 40 points.
- Pay on time
Pay your bills on time. It shows your lenders that you are fiscally responsible. If you can’t pay the full amount, settle no less than the minimum due. If you still can’t make the minimum payment, ask your lender if they can extend the payment date. Late payments can harm your payment history, which is 35% of your FICO score.
- Lessen your credit utilization
Credit utilization is the portion of your credit limit that you’re using at any given time. The simplest way to keep it in check is to pay your monthly credit card balances in full. If that is not possible, a good rule of thumb is to maintain your total balance at 30% or less than your credit limit. In FICO systems, it is advisable to bring it down to at least 10%.
- Establish a long credit history
Even if you have a credit card you haven’t used, don’t cancel. The longer your credit history is, the better it is for your credit rating. Your credit history speaks to your ability to obtain credit, which impacts your mortgage interest rate.
- Don’t apply for new credit
When you apply for a new credit card ahead of a home loan, you hurt your chances of securing more favorable interest rates. Lenders see a new line of credit as possible debt in the future and factor in its usage on top of your monthly mortgage payments.
Real estate agents Paul and Kamron have helped many buyers just like you successfully navigate the home buying process. As experts helping house hunters in Denver Metro and Boulder County, CO, they will be with you at every stage of your real estate journey. Call Paul and Kamran today at 720.232.5842 (Paul) or 303.520.3223 (Kamron). You can also send an email to Paulwaz(at)me(dotted)com or Kamronwaz(at)me(dotted)com to learn more.