Your credit score is a critical metric used in assessing your creditworthiness and financial responsibility. It is key in determining whether or not you’re approved for a mortgage. A good credit score not only improves your chances of qualifying for a mortgage but also determines the interest rate you are offered and mortgage insurance.
Here, we’ll dwell on how to improve your credit score for a mortgage.
What Exactly is a Credit Score?
Understanding what a credit score is, how it affects you, and how it is calculated is fundamental to managing your finances and making major purchases like a home.
Your credit score is a cumulative result of your credit history, encompassing your payment history, outstanding debts, available credits, and length of credit history. Credit scores often range from 300-850, with the higher scores indicating a better look before potential lenders.
At The Mortgage Shop, we understand how essential a good credit score is for getting approved for a mortgage. Our experienced team of mortgage brokers specializes in helping clients secure the best possible mortgage rates and terms. Take advantage of our services and learn how to improve a credit score to buy a house.
Why is a Good Credit Score Important for Getting a Mortgage?
Lenders see your credit score as an indicator of your financial responsibility. They use your score to determine your risk as a borrower. A higher credit score means you are more likely to make payments on time and less likely to default on the loan.
A good credit score makes it easy for lenders to be willing to offer you lower interest rates and favorable loan conditions.
As you would also expect, the opposite is the case when you have a poor credit score. Lenders will consider you at greater risk and may be hesitant to offer you a mortgage or may only offer poor terms like high-interest rates or a big down payment. People who fall in this bracket are known as subprime borrowers, and the interest rates are often higher than conventional mortgage loans to compensate for the risk factor.
Steep conditions like these only make it harder to buy the house you want when you want, as high-interest rates mean you are paying more money over your loan life. Similarly, a big down payment means you need a stash of cash upfront which could further delay your plans. But it’s not all bad news! Many people begin with a poor credit score, and can improve their scores with time. Any potential homeowner can learn how to improve their credit score to buy a house.
Additionally, while striving to boost your credit score to qualify for a mortgage, it’s wise to explore various means of maximizing the perks of owning a home. One such option worth considering, especially for senior citizens, is a reverse mortgage. With this type of mortgage, you can tap into the equity in your home to access funds that can help cover expenses in your golden years.
The Mortgage Shop offers informative resources that can guide you on how to leverage reverse mortgage benefits in 2023. By taking advantage of these materials, you can gain insights into how this mortgage option can fit into your overall financial strategy.
How are Credit Scores Calculated?
In the US, Equifax, TransUnion, and Experian, report, update, and store consumers’ credit history nationwide. While there may be some discrepancies in the credit report collected from these credit bureaus, five major factors are often assessed when calculating a credit score.
Your payment history accounts for 35% of the total credit score. Payment history indicates how well you have managed your past debts and whether or not you’re one to make your payments on time. Lenders use your payment history to determine that you will repay on time in the future.
The total amount owed by a person is an essential factor that affects their credit score and makes up 30% of the total. This factor considers the percentage of credit available to a person being used, also known as credit utilization. Credit utilization assesses how much debt a borrower has, compared to their credit limits. A high credit utilization shows overextension and indicates you may have difficulty repaying your debts in the future.
Length of Credit History
The length of your credit history also affects your score and accounts for 15% of the total. This factor takes into account how long you have been using credit and the age of your credit accounts.
Longer credit histories are seen as less risky. The rationale is that longer credit histories present more data to assess payment history. With more data available, evaluating your creditworthiness more accurately and determining the likelihood that you will repay your debts on time is easier.
Types of Credit Used
The type of credit you use is crucial in calculating your score, making up 10% of the whole. Here, what is considered is your mix of credit, including installment credit, car loans or mortgage loans, and any revolving credit, like credit cards. A mix of credit types is seen as less risky because it demonstrates that you can manage different types of credit responsibly.
New credit represents 10% of the total score. It focuses on how many new credit accounts you have, how many new accounts you have recently applied for, and when the most recent account was opened. Lenders view new credit as a potential risk factor because it indicates that you may be taking on new debts and obligations.
How Can I Check My Credit Score?
Credit reports from credit bureaus do not usually contain the consumer’s credit score.
To check your credit score, you have the following options:
- Consult your credit card company, bank, or loan statement. Many of these institutions provide this information.
- Another option is to buy your credit score directly from a major credit bureau.
- Use a credit score service or online free credit scoring sites.
Are You Thinking of How to Improve Your Mortgage Credit Score?
Good credit scores are not just crucial for personal finances but are also a critical component in your journey to getting your dream home. The following quick tips will guide you on how to improve your mortgage credit score:
Assess Your Reports
The journey to improving your credit score should ideally start with the assessment of your reports from each credit bureau. When reviewing, pay particular attention to the following:
- Negative information like late payments, huge debt-to-credit ratio, collection accounts, low available credit, too many hard inquiries, etc.
- Reporting errors, including unauthorized or unexplained revolving debt, new accounts, or lines of credit.
Open Dispute on Negative Information
Credit report mistakes can significantly impact your credit score, and they are more common than you might think. Fortunately, under the Fair Credit Reporting Act (FCRA), you can dispute any errors on your credit report with the appropriate credit bureaus. They are required to conduct an inquiry into your disagreement within 30 days.
Fixing errors on your credit report should be a top priority when it comes to improving your credit score quickly. If you find errors negatively impacting your score, it’s crucial to dispute them as soon as possible.
Clear All Outstanding Payments by the Due Date
Making timely payments communicates that you are responsible and can manage your debts effectively.
One effective strategy to ensure on-time payments is to arrange for recurring payments via your loan provider or bank. Doing this will help you avoid late or missed payments, which can negatively impact your score.
Settle Revolving Debt
Paying your credit card debt can help your credit and reduce your debt-to-credit ratio over a period.
Another effective strategy is substituting your current balance with personal loans since personal loans are considered installment loans. They can help boost your credit score when used well.
Consider Becoming a Certified User
Becoming a certified user is a clever way of preparing your credit for a mortgage. You receive a lift by being added as a certified user to someone else’s (maybe family or friends) account with excellent credit. Even though you don’t operate these accounts, their excellent history appears on your report.
Remember that late payments and high balances from family and friends will also hurt your score.
Request Rapid Rescoring
To quickly correct errors on your credit report, consider rapid rescoring. Contesting inaccuracies in your report can be a lengthy process and may take several months. Likewise, card companies may require a significant amount of time to update modifications on your account after you have reduced your outstanding balance.
Rapid rescoring is a facility that enables you to acquire a fresh credit score within a few days, rather than months. It is crucial to emphasize that swift rescore services do not hold direct interaction with homebuyers as they are solely accessible by your home loan provider.
Be Careful Not To Max Out Credit Card
We recommend you ensure your credit card balances remain at a level that is not higher than 30% of the credit limits that have been made available to you. Exceeding your limit can harm your credit score.
Increase the Proportion of Debt to Income
Your debt-to-income ratio (DTI) significantly affects your mortgage qualification. The lower your DTI, the higher your chances of being approved for a home loan. Paying down your debt improves your DTI. You can calculate your DTI by adding up all of your monthly expenses and dividing the total by your gross monthly income.
Avoid Accounts Closure Before Your Loan Application
Maintaining a long and well-managed credit history is requisite for improving your score. Credit firms look at the mean duration of credit accounts to tally credits, and they prefer to see an extensive record of responsible account management.
If you have completely settled a card balance, it’s best to wait to close the account before contemplating a home loan. Keeping the account open can maintain your average credit age and positively impact your credit.
Refrain from Fresh Credit Cards or Loans
You must be careful when applying for new credit. It’s best to avoid opening fresh credit lines during the months preceding your application, since opening new lines of credit could hurt your score and make it more challenging to qualify for a home loan.
Your credit score reflects your financial responsibility and plays a significant role in the mortgage qualification process. You must know how to improve your credit score for a mortgage to achieve your dream of homeownership.
The Mortgage Shop is here to help. We will guide you on how to improve your credit score to buy a house. Learn more about our services and take the first step toward owning your home.
At The Mortgage Shop, we understand how essential a good credit score is for getting approved for a mortgage. Our experienced team of mortgage brokers specializes in helping clients secure the best possible mortgage rates and terms. Take advantage of our services and learn how to improve credit score to buy a house.