How does my credit score impact my mortgage?
For this reason, your credit score is one of the primary factors that influences your mortgage application. Many mortgage companies have minimum qualifying credit score requirements depending on the type of loan program an applicant is seeking. But it is important to understand how your credit score impacts various aspects of your mortgage.
Your credit score is considered in various ways when it comes to a home loan. From your mortgage rate to the type of loan programs you qualify for, your credit score has a significant impact. When preparing to purchase a home or refinance a mortgage, you should first understand how your credit score can impact your mortgage.
5 Ways Credit Scores Impact Mortgages
Mortgage Rates: Going from a fair credit score (580 – 669) to a very good score (740 – 799) could result in a difference of 0.5% in your mortgage interest rate.
Loan-to-Value (LTV) Ratio: The amount you can borrow for a particular property, referred to as the LTV, is largely driven by your credit score. Lower scores could result in smaller loan amounts.
Loan Programs: Your credit score will significantly impact your eligibility for particular loan programs. For example, with a credit score below 620, you will not qualify for a conventional mortgage.
Leniency: In many cases mortgage companies can offer leniency in some areas of your mortgage if you have a good track record for paying off your debts. However, lower credit scores are unlikely to receive these kinds of benefits.
Private Mortgage Insurance (PMI): When making a down payment less than 20% you will be required to carry PMI. Insurance companies will look at your credit score when calculating the cost for your PMI.
Tips for Improving Your Credit Score
Dispute Incorrect Credit Reports: When looking at your credit score, examine them thoroughly to make sure there isn’t any information that is incorrect. If you do see late payments or unpaid bills that aren’t correct, make sure to file a dispute ASAP.
Pay Down Balances: If you have multiple credit cards that are maxed out, it is critical to pay down those debts to much lower levels. For example, if you have a credit line of $5,000 and you owe all $5,000, your credit utilization is 100%. Some experts say 30% or less credit utilization is best for your credit score.
Pay Credit Cards Twice a Month: Your credit score is a point in time date point. That means if you’ve maxed out your credit card at a time when your credit is pulled, you’ll show a 100% credit utilization rate. Keeping that low when you run your credit report is critical.
Increase Your Limits: Perhaps you aren’t in a position to pay off your debts completely, but you can improve your credit utilization rate by increasing your credit limit. This will be subject to approval by your credit card company.