Your credit score is like the grade point average of your financial life; it’s one of the most crucial elements lenders consider when approving a mortgage application.
A higher credit score can open the door to loans with lower interest rates and easier approvals, as well as reduce monthly payments and maximum home price you can purchase, depending on the loan type and credit tier.
Most lenders utilize the FICO model to calculate credit scores, which range from 300 at the low end to 850 at the high end. A score of 740 or higher is considered “very good,” providing access to lower mortgage rates and an easier approval process.
Conventional loans typically require a minimum credit score of 620, though this may differ by lender. Other loan types require lower minimum scores and some mortgage programs have no credit score requirement at all.
Lenders consider more than just your credit score when assessing your mortgage application, taking into account other elements like debt-to-income ratio (DTI), employment history and down payment amount. With these additional variables in place, lenders may grant you a loan even with a slightly lower credit score than what they consider “good”.
How to Prepare Your Credit Score For Mortgage
Before applying for a mortgage, the best way to improve your score is by making sure there are no derogatory items on your report such as bankruptcy or foreclosures. Doing this will demonstrate to lenders that you’re in excellent financial standing and won’t have any difficulty repaying any loans.
Another way to boost your credit score is by paying off other debts such as student and auto loans before applying for a mortgage. Doing this can save you thousands in interest and PMI charges in the long run by decreasing your debt-to-income ratio – that is, how much of your income goes toward non-mortgage expenses – from 100%.
Other ways to raise your credit score before applying for a mortgage include eliminating inaccurate information from reports, disputing errors and making sure debts are being paid off on time and in full. It’s also wise to get your credit report from each major credit reporting agency so you can see where it stands and what needs fixing.
When trying to improve your credit score before applying for a mortgage, remember that it may take some time. Furthermore, keep in mind that scores can fluctuate significantly during the loan term if you apply for multiple loans simultaneously or within short intervals after making an application.
Your credit score is one of the most crucial elements in determining loan approval, so it’s essential to know how it stacks up. You can check it for free at all three major bureaus: Equifax, Experian and TransUnion.
