Your credit score is one of the most crucial elements in determining whether or not you qualify for a mortgage loan. It’s calculated based on your debt load, credit card balances and how you handle payments for various loans.
A high credit score can help you qualify for a low interest rate on conventional mortgages, particularly those with credit scores of 620 or higher. Lenders use what’s known as the risk-based pricing model to determine mortgage rates and payment terms; those with better scores generally find better loan conditions than those with lower scores.
The minimum credit score requirements for most mortgages vary, depending on the type of loan. Generally speaking, conventional mortgages require between 620 and 660; those with lower scores may need to consider government-backed options like FHA or VA loans.
There are several ways to boost your credit score, such as paying down debt and keeping your utilization rate (the amount of available credit compared to total available credit) low. Furthermore, restricting new credit applications within one year after applying for a mortgage may also help raise your score.
Your credit score will be affected by your income and debts, as well as the size of the down payment you make. If you’re purchasing a home with a mortgage, the lender will review all this data to decide whether or not to approve your application.
Every year, you can obtain your credit report free from each major consumer reporting agency: Experian, Equifax and TransUnion. It is wise to have it reviewed by a specialist before applying for a mortgage loan.
Remember, the length of your credit history plays a role in determining your score. Therefore, try not to open too many new accounts and be sure to pay all bills promptly each month.
Be sure to inform the three major credit bureaus of any errors found on your report and take immediate steps to rectify them. You can do this either online through their websites or by calling them directly.
Another way to boost your credit score is by paying down high credit card debt, as this will reduce the utilization rate – an integral factor in calculating credit scores.
FHA loans (as well as VA and USDA loans) require a minimum credit score of 580 to 619 to qualify for the most advantageous interest rates. If you want to take out one of these loans, however, your score must fall between these limits to qualify.
In addition to a minimum credit score, lenders typically require other qualifications as well. These could include having an established source of income, sufficient liquid assets and a low debt-to-income ratio.
If your credit is less than perfect, there are still mortgage options that can help you find a great deal on a loan. Non-QM (non-qualifying mortgages) offer more freedom when purchasing your new home by not meeting strict federal guidelines.