What Buyers Should Know About Credit Scores
If you’re thinking about buying a home, you should know that your credit score is a critical piece of the puzzle when it comes to qualifying for a home loan. Lenders review your credit to assess your ability to make payments on time, pay back debts, and more. It’s also a factor that helps determine your mortgage rate. An article from Bankrate explains:
“Your credit score is one of the most important factors lenders consider when you apply for a mortgage. Not just to qualify for the loan itself, but for the conditions: Typically, the higher your score, the lower the interest rates and better terms you’ll qualify for.”
Because mortgage rates are a crucial component of affordability, especially today, your credit score may feel even more vital to your homebuying ambitions right now. According to the Federal Reserve Bank of New York, the median credit score in the U.S. for those taking out a mortgage is 765. But that doesn’t mean your credit score has to be perfect. An article from Business Insider explains generally how your FICO score range can make an impact:
“. . . you don't need a perfect credit score to buy a house. . . . Aiming to get your credit score in the ‘Good’ range (670 to 739) would be a great start towards qualifying for a mortgage. But if you're wanting to qualify for the lowest rates, try to get your score within the ‘Very Good’ range (740 to 799).”
Working with a trusted lender’s the best way to get more information on how your credit score could factor into your home loan and the mortgage rate you’re able to get. As FICO says:
“While many lenders use credit scores like FICO Scores to help them make lending decisions, each lender has its own strategy, including the level of risk it finds acceptable. There is no single "cutoff score" used by all lenders, and there are many additional factors that lenders may use to determine your actual interest rates.”
If you’re looking for ways to improve your score, Experian highlights some things you may want to focus on:
- Your Payment History: Late payments can have a negative impact by dropping your score. Focus on making payments on time and paying any existing late charges quickly.
- Your Debt Amount (relative to your credit limits): When it comes to your available credit amount, the less you’re using, the better. Focus on keeping this number as low as possible.
- Credit Applications: If you’re looking to buy, don’t apply for other credit. When you apply for new credit, it could result in a hard inquiry on your credit that drops your score.
When you're ready to begin the home-buying process, a lender can determine which range your credit score fits into and tell you more about the nuances of each loan type.
With today's affordability issues, prioritizing ways to improve your credit score could help you receive a better mortgage rate. Let's talk if you want to learn more.