How Does a Credit Score Affect the approval for a Mortgage?
July 17, 2024
When it comes to purchasing a home, your credit score determines not just whether you can get a mortgage, but also how favorable that mortgage will be. But what exactly is a credit score and why is it important?
A credit score is a numerical representation of your creditworthiness, ranging from 300 to 850. It's based on your credit history, including your payment history, the amount of debt you have, and the length of your credit history. When buying a home, lenders use your credit score to assess the risk of lending you money. A higher credit score generally means you’ll qualify for better mortgage rates and terms, which can save you a significant amount of money over the life of your loan
How Does a Credit Score Affect the approval for a Mortgage?
Lenders pull your credit score to evaluate your financial health. A higher score helps to boost approval chances and helps secure lower interest rates. A score of 620 is typically the minimum, but 740+ gets the best rates.
Besides influencing loan approval, a higher credit score can also lead to better loan terms. It can increase your borrowing capacity, reduce or eliminate the need for private mortgage insurance, and speed up the loan approval process.
Steps to Improve Your Credit Score
- Pay bills on time. Payment history is the most significant factor in your credit score
- Reduce debt by paying down balances.
- Avoid opening new credit accounts.
- Review your credit reports for errors and dispute any inaccuracies.
Common Misconceptions about Credit Score
1. Checking your own score will hurt or lower the score it: Not true; it’s a “soft inquiry”. Soft Credit Inquiries do not affect your credit score and are not visible to other lenders. Hard Credit Inquiries can impact your credit score and are visible to other lenders.
2. Closing old accounts will boosts your score: It can actually lower your score. Maintaining a good credit score is important at all times.
Start working on your credit score well in advance of house hunting. Understand your credit report, tackle any issues early, and stay disciplined with your finances. With a strong credit score, you’ll have more options and better terms, making the home buying process much smoother.