September 29, 2020
4 MINUTE READ
While it’s no secret that having a good credit score can improve your chances of getting approved for a mortgage or refinance, understanding the meaning of your score and how it can influence your eligibility —as well as your interest rate— isn’t as easy as it sounds. Here’s a quick guide to how your credit score impacts getting approval for a home loan.
Roughly 35% of your credit score is dependent on your history of timely payments made on any debt you may have. If you have made all of your payments on time, there is a great chance you will do so in the future, making your credit score higher. If you have had late payments, tax liens, bankruptcies or lawsuits, this can result in a lower credit score. Your credit score is essentially the history lenders want to see to believe you will make your loan payments on time.
About 30% of your score is based on how much money you owe, or your credit utilization. Higher balances will lower your credit score and lower balances will strengthen your score.
Roughly 15% of your score is calculated based on the length of your credit history. The longer you have had accounts open, the more positive your score will be.
The types of credit you have also impacts about 10% of your score. Having a mix of installment and revolving debt can help you prove that you can handle various types of payments.
Another 10% of your credit score is determined by new lines of credit. Opening new lines of credit too fast can have a negative impact on your credit score, since it may look like you are frantically trying to gain credit. Inquiries on your credit for lending reasons may ding your score by a few points, but looking at your credit score yearly for educational reasons won’t affect your score.
Keep in mind not every credit scoring formula is exactly the same, but this is the general criteria lenders use to make decisions.
Unfortunately, there is no magic number for the right credit score for approval on a home loan. There are multiple factors that play into qualifying for a mortgage besides your credit score, including what kind of loan you’re seeking, your employment history, and your debt-to-income ratio. According to FICO, to qualify for a conventional mortgage you’ll need around a 620 credit score, a 580 for an FHA mortgage, and 620 for a VA loan.
Before you ever begin the mortgage process, you need to know your credit score and understand what impacts it. Once you have a good hold on this information, you can begin to improve your credit score and give yourself a good chance of qualifying for the best mortgage loan for your situation.
While it is possible to qualify for a mortgage loan even with a lower credit score, this will place more weight on your income and amount of debt.
Those that have high credit scores often get lower interest rates on mortgages than borrowers with low credit scores. According to Bankrate.com:
Lenders are looking for borrowers with low balances, a mix of credit card utilization, and a long history of payments made on time. Banks and lenders are looking for borrowers who have a proven track record of making payments on time and not defaulting on their loans.
If you are looking to get approved for a home loan, make sure you are not applying for new lines of credit. While you can’t always avoid this, you should resist opening new credit if you can. Multiple new credit accounts can have a negative impact on your score.
Reali Loans makes home financing easy. Contact us today and tell us about your unique situation and we’ll help you understand what kind of home loan is best for you and your family.