Your credit score plays a significant role in the decision you make when applying for a mortgage. It affects interest rates, loan terms and how much you can borrow. Furthermore, it determines how much you pay in fees such as private mortgage insurance (PMI).
Your credit score has the greatest influence over the type and interest rate of mortgage you qualify for. The lower your score is, the higher your monthly payments will be.
To improve your credit score, pay off bills promptly and maintain a low debt-to-credit ratio. Additionally, avoid making large purchases and reduce the amount of outstanding credit card debt.
Before applying for a mortgage, review your credit reports from all three bureaus. Look out for inaccurate information such as an incorrect name or address, or accounts that don’t belong to you. Incorrect account statuses like closed accounts reported as open or delinquent accounts labeled incorrectly can also negatively impact your score.
When applying for a new line of credit, such as a credit card or student loan refinance, it will place an inquiry on your credit report. That’s why it’s best to wait until after being approved for a mortgage before seeking other forms of financing.
Multiple hard inquiries won’t affect your credit score as long as they occur within 45 days of each other. This means you can make multiple loan applications in the same month and only experience a minor dip in score (around five points).
If you need to apply for a mortgage, do your research and compare loan products from different lenders. Doing this will help you locate the best deal and avoid getting locked into an expensive high-interest mortgage.
Lenders will take into account your income, employment history and debt to assess your ability to repay the mortgage. It’s also essential that you have enough savings for a down payment if necessary.
Lenders also take into account your debt-to-income ratio (DTI), which is the percentage of income spent on debt. Ideally, this should be below 36 percent.
Debt can increase the risk of defaulting on your loan, so to reduce it as low as possible try to keep your debt-to-income ratio low. To do this, make sure you pay off your mortgage payments on time and keep credit card balances low.
Your mortgage payment can also influence the length of your credit history, an indicator that demonstrates how reliable you are at managing debt. The longer this record exists, the greater chance there is that you will be able to maintain a healthy debt-to-income ratio.
Your credit score is affected by your mix of loans, such as installment loans and revolving credit cards. A combination of these types of debt shows that you’re capable of handling different forms of credit.