When it comes to obtaining a home loan for the purchase of a home or refinancing of a home you own, your credit score is a vital piece of the qualifying puzzle. Sure, a 580 score is eligible for some financing programs, but generally, the higher your credit score the more options you will have and the better your loan terms will be. Credit scoring happens to be one of the more misunderstood aspects of mortgage qualification. Read on to learn more about credit scoring in the context of mortgage qualification.
How Lenders Use Your Credit Score
A credit check may be standard when applying for a mortgage. If you were pre-approved for a home loan, your lender may have already checked your credit report and score from each of the three major credit bureaus. Once you’ve made an offer on a home and it’s been accepted, the lender may pull your credit reports and scores again as part of the underwriting process.
At this stage of the mortgage process, your lender uses your credit score, along with other financial information, to determine whether to approve you for a loan. The minimum credit score you need to qualify may depend largely on the type of mortgage you applied for and the lender’s specific requirements.
If your credit score falls below a certain mark, you may still qualify for an FHA Loan. These loans can be good for people who are buying a house with less than perfect credit because it may be possible to still qualify.
Credit Score and Your Interest Rate
Your credit score may come into play at another critical step in the mortgage process: determining your interest rate.
Again, while it’s not the only factor that affects your interest rate, your credit score is important. A higher credit score often means that you may qualify for a lower rate, while buying a house with less than perfect credit may translate to a higher mortgage rate.
Understanding the rate you qualify for, based on your credit score and other factors, is critical because it directly affects your monthly mortgage payment and how much you’ll pay for your home over the lifetime of your mortgage loan.
5 Simple Ways to Increase your Scores
1. Set bill payments to autopilot
Credit scores are based on several different factors, with payment history being one of the most important. One of the best ways to increase your credit score is simply making sure your bills are paid on time each month. Set up automatic payments from your bank account to avoid late payments, which may ding your score in a big way.
2. Put credit card alerts to work
Another important piece of the credit score puzzle is your credit utilization rate, or the amount of available credit you’re currently using. Keeping your credit card balances low could help to increase your credit score, while a higher utilization may hurt your score. Experts typically advise keeping your credit utilization under 30%. In order to keep tabs on your utilization rate, set alerts to notify you when your balance is getting close to your credit limit or if it passes a certain dollar amount. Then, you can know when it’s time to hold off on new purchases so your utilization isn’t negatively affected.
3. Request a credit limit increase
Asking your credit card company for a credit limit increase is another way to potentially increase your credit score. With more available credit, your credit utilization will lower—as long as you aren’t increasing your balance at the same time (i.e. don’t start spending more just because you have a higher credit limit).
4. Pay down balances, but don’t close older accounts
Lowering your credit card balances can improve your credit utilization rate and potentially boost your score. A simple way to accelerate debt repayment is to switch to weekly or biweekly payments. Even if you’re making smaller payments, you may cut down on the interest paid and chip away at the balance more quickly. Another option for reducing interest charges is applying for a credit card with a 0 percent APR balance transfer offer. Remember that you’ll need to pay the balance in full before the promotional rate ends; otherwise, interest charges may still apply. Once you zero out a credit card balance, don’t rush to close the account down. Part of your credit score is based on your credit history, and having older accounts on your credit report may work in your favor.
5. Remove credit report errors
Credit report errors, such as an inaccurately reported balance or payment history, can hurt your score. Try not to let them linger. All three major credit reporting bureaus allow you to dispute credit report errors online. If your dispute is valid, the error has to be removed or corrected, either of which may increase your credit score. If home ownership is in your sights, learn more about how your credit impacts the buying process learn about the buying process here.