Posted on: 13 December 2018Share
Home purchases can be both exciting and stressful. While the home search itself can be fun, the effort to get a mortgage approval is often filled with confusion and anxiety. Read on to find out what you can do to help influence one facet of that approval process: your credit score.
What Do Lenders Look for in Terms of Creditworthiness?
Being approved for a home loan is a multi-legged beast. You should pay attention to things like:
- How long have you worked at your job?
- What is your income?
- What other debts do you have?
- What is the price of the home?
- How much is your down payment?
- Do you have previous foreclosures or bankruptcies?
- What is your credit score? See below to learn more.
Scores Requirements are Not Set in Stone
This three-digit number comes from credit agencies, and various lenders use various agencies and scoring models. It's difficult for buyers to know for certain the exact score most lenders want to see, but many conventional lenders require applicants to have scores in the mid 600's and higher. Some government guaranteed loans (FHA, USDA, VA, etc) have lower requirements for scores. To add to the confusion, the required score can vary depending on the amount of the loan and other credit and income factors.
Why Your Score Matters
Not only are higher scores more likely to rate an approval by the lender, the higher your score, the greater the likelihood of getting a loan with a favorable interest rate. Don't discount how much a small difference in a mortgage interest rate can influence the total cost of the loan and the amount you must pay each month for a payment.
Taking Action to Improve Your Score
Scrutinize your credit report and report all errors to the credit bureaus. You should contact all three bureaus well in advance of applying for a mortgage since it can take time to make corrections that might affect a score. Experian, Equifax, and TransUnion are all good ways to check your credit score.
It can take years for a late payment to "fall off" a credit report, but the effect on your score begins to lessen well prior to that. Be sure not to be even a day late with your credit card payments. Pay close attention not just to the total amount of money you owe to creditors, but to the ratio. One aspect of your score is debt utilization. This means the amount of your available credit you are using. For example, if your top credit limit is $1,000 and you owe about $300.00 you have a debt utilization of about 30 percent. The lower your debt utilization, the higher your score. Pay your balances down as low as you can before you apply for lending.