How your credit score affects your mortgage

Key Insights

• Most lenders will take your credit score — and other financial factors — into account when considering you for a loan.
• You have more than one credit score and different factors carry more or less weight.
• There are things you can do to improve your credit score.

If you are considering buying a home, it’s important to understand all the factors that go into the process. And if you’ll be taking out a home mortgage, knowing how your credit score can impact your options is an important first step.

Why do credit scores exist?

The credit score was first introduced in 1989 by the Fair Isaac Corp, also known as FICO, to make it easier for lenders and borrowers to agree to loan terms. The credit score sought to:

• Ease the manual and time-consuming process of reviewing consumer data
• Remove the occurrence of racial, gender and class bias
• Create a standard that was more transparent to lenders and borrowers alike

The credit score model established a standard that assessed consumers’ credit histories and assigned a three-digit number between 300 and 850 for evaluating a person’s “creditworthiness.”

What factors determine my credit score?

Your credit score is informed by your credit reports, which include things like your personal information, bill payment history, credit cards, loans, bankruptcies and current debt. The three major credit bureaus that collect this information are:

• Equifax
• Experian
• TransUnion

The three bureaus share your history with credit scoring companies like FICO and VantageScore who then use it to calculate your credit score. Because there are multiple scoring models and credit bureaus, there are also multiple credit scores, but the scores are typically pretty similar. Keep in mind that you have the right to dispute inaccuracies in your credit reports and to get explanations of score calculations under the Fair Credit Reporting Act.

What matters most to lenders?

Both FICO and VantageScore have specific scoring models for specific lending purposes, and certain factors may carry more weight when you’re being considered. For example, with both models, your payment history matters more than the different types of credit you have or how long your credit history spans.

Your payment history comprises 35-40% of your total credit score, so it’s important you pay your bills on time and in full. Keep in mind that your credit score will decrease any time you open new lines of credit, so avoid opening new credit cards when you are searching for or buying a home. It’s also smart to avoid big purchases as you are home searching, too, whether paying for them in full or purchasing them on credit.

How will a lender use my credit score to determine my interest rate?

Your credit score helps lenders assess the risk of lending you money and helps inform whether you’re likely to make good on your payments. Your finances, including your debt-to-income ratio and your credit score, can impact your loan approval, down payment requirements and monthly payments, including your interest rate.

While there are other considerations, generally a credit score in the high 700s (and up) is considered good and will give you more attractive options. The difference between top qualifying scores and lower scores can amount to over a 1% lower/higher interest rate, which can make a big difference in your monthly payment amount.

Of course, there are considerations like the loan type (conventional or FHA), down payment amount, and individual financial situations that vary significantly.

What if I have a lower credit score?

If you have a lower credit score, according to Experian, there are some things you can do to improve your score:

• Make all of your payments on time
• Pay down revolving credit accounts like credit cards
• Explore debt consolidation
• Keep your oldest account open
• Limit new credit applications
• Dispute inaccurate information on your credit report

If you’re hoping to buy in the next year or so, start planning now and avoid unnecessary expenses during the loan application process.

Get in touch

Whether you’ve been saving for a down payment for years, you’re wondering whether you can buy with student loan debt or you’re ready to get pre-approved for a mortgage, we can help. Reach out to Edina Realty or one of our agents today to keep moving forward.

_{Prosperity Home Mortgage, LLC is not a credit counselor. Information displayed is not credit advice and should not be relied upon or interpreted as such.
Prosperity Home Mortgage, LLC does not offer financial advice.
This information is provided for informational purposes only and does not constitute legal, tax, or financial advice.}