Your credit score is one of the most important factors that home loan lenders consider when it comes to qualifying you for a loan and as a prospective homebuyer, you want to ensure you have the best credit score possible because your score will determine whether or not you qualify for a loan and what the associated interest rates will be.
Why should you care about your interest rate?
Well, the interest rate you get on your loan has a big impact on how much your monthly mortgage payments will be as well as how much interest you’ll end up paying over the life of your loan—which can run into tens of thousands (and even hundreds of thousands) of dollars depending on the original price of your home.
So how does your credit score relate to your interest rate?
Having excellent credit (a credit score of 750 and above) means that you will very likely get the best possible interest rate available.
If you have good credit (a credit score of 650 to 750) then your interest rate can be anywhere from a quarter to a half percent higher than the lowest available interest rate.
Poor credit (a credit score of 550 to 650) or bad credit (a credit score of 550 and below) means your interest rate could be up to four percent higher than the lowest available interest rate, or you might not qualify for a home loan at all.
That being said, here are some important factors that make up your credit score if you are considering buying a home:
Your payment history
This is a history as to how well you have paid your bills over time. This includes late and skipped payments, which has the heaviest weighting on your overall credit score. As you prepare to buy a home, you want to ensure all your credit payments are current.
Your credit utilization
This is how much of your available credit that you have used, also known as your debt-to-credit ratio. If you are close to your credit limit, it means your credit utilization is high and this might be a red flag to home loan lenders as they may deem that your debt seems excessive. Ideally, your credit utilization should be no more than 30 percent of your available credit.
Your credit history
This is the history showing how long each of your accounts has been open as well as any account activity. A longer credit history provides lenders with more information about your behavior with credit that can be used to determine your credit worthiness.
Your new credit
This is a combination of how many credit accounts you have opened recently as well as how many recent inquiries have been made on your credit report. If you have a high number of new accounts and inquires, it could give lenders concerns as to why you need access to so much credit at once, so if you are trying to buy a new house it’s important to limit new credit accounts and inquiries.
The types of credit you have
Lenders also look at the mix of different types of credit accounts you have (e.g. credit cards, mortgage, auto loan and student loans). This information may help lenders determine how much “good debt”(e.g. a mortgage) vs “bad debt” (e.g. credit cards) you have to determine your level of financial responsibility.
As you prepare to purchase your new home, be sure to keep these factors in mind when it