Your credit score is an essential factor in determining much about any mortgage loan you receive. A credit score is a measure of your trustworthiness as a borrower. It pays to know as much about your credit score as possible before applying for home loan funding. Here are four key points to understand:
1. Credit Scores Are Calculated by Financial Formulas
Credit scores (also called FICO scores because they were created by the Fair Isaac Corporation) is determined by a several factors. The weightiest element - 35% - is your payment history. The more often you have been late on making your payments, the lower your credit score will be. The next largest factor - 30% - is your utilization rate. The is the ratio of how much debt you owe compared to your total available credit. Maxing out all your credit accounts will pull your score down. Another 15% of your score is made up of the length of your credit history. Shorter histories give credit bureaus less data to evaluate and may bring your score down. The types of credit you have accounts for 10% and the last 10% is determined by the number of inquiries on your credit report. That means how often you are applying for new credit accounts.
2. You Can Check Your Credit Score for Free
Your credit score is available through the three major credit reporting bureaus – Equifax, Experian, and TransUnion. By federal law, you are allowed to check your credit report once year from each of the credit bureaus. Some websites will allow you to get the actual FICO score for free while other will require a fee. And checking your own credit score will not have a negative impact on your score. In fact, it is a good idea to check your credit report at least annually to look for any inaccuracies and to make sure your score is where you expect it to be.
3. Credit Scores Affect Mortgage Interest Rates and Loan Amounts
Credit scores are 3-digit numbers ranging from about 300 to 850. Good scores start at about 680 and truly poor credit begins under 620. If you have a score above 720 you will be able to qualify for the best mortgage rates. The lower your score, the higher your interest rate is likely to be. The lowest credit scores may disqualify you from certain loan programs as well. With excellent credit you may be able to borrow more for a home than you would with a less-favorable credit report.
4. You Can Take Steps to Improve Your Score
The good news is that if your credit score is not where you’d like it to be, you can improve it. The best way to push it up is to start making all your payments on time. This will take some time to show up in your score but it will have the biggest impact. You can also pay down all your credit accounts to roughly 30% of their limit to lower your utilization rate. And if you limit the number of new accounts you apply for in a given period, you may also be able to raise your score.
Once you understand these basic facts about credit scores, you will know how your score will affect your mortgage terms and will be in good shape to apply for a home loan.