How Credit Affects Your Mortgage

By Zarine Torrey, Senior Mortgage Loan Officer

For some, home ownership is a critical part of the American Dream. There is a profound sense of pride and freedom that comes from owning a home, in addition to increased financial security. Buying a home is a major step in one’s life, and takes efficient planning.

Before you look for a home, it’s smart to check your credit scores, with a pull from the three major credit agencies. Your credit is one of the most important factors in qualifying for a mortgage. It also dictates what program you can qualify for, the amount of the down payment required, and what your interest rate will be. This is the first qualifying factor a lender will usually look at. Typically the higher the credit score, the lower the interest rate. Scores can range anywhere from a low of 300, to a high of 850. Tackling credit issues early on can help you raise your score, therefore strengthening your profile before even applying for a mortgage.

If your credit score is not ideal, here are some tips to raise your score:

Check your credit report and correct any errors – you can request a FREE copy of your credit report once a year from annualcreditreport.com. You want to make sure the information is accurate, complete and up to date. If there are any errors, you can tell the credit reporting company, in writing, what information is inaccurate. The credit reporting company must then investigate the issue within 30 days.

Pay down credit card balances below 30% of the maximum limit – This will maintain a good or excellent credit score. The lower your utilization rate the higher your credit score. Some tactics could be to make multiple small payments to keep the balances down, ask for a credit limit increase without a “hard” credit inquiry and start with balances on the cards with the highest utilization first and move some debt by getting a debt consolidation loan.

Pay all bills, including rent, credit cards and loans on time – no strategy to bump up your score will work if you don’t pay your bills on time. Payment history has the biggest influence on credit score. If you are behind, consider asking to make payment arrangements to get current. Missed payments stay on your credit report for 7 years. Focusing on paying every bill on time will offset the old negative payments with the new positive payments.

Don’t close older credit lines after paying them off – having an available line of credit with no balance always helps your credit score. The older the creditor has been on your credit report shows that you have been establishing credit history for many years vs a few months.

Avoid opening any new lines of credit or taking out large loans – opening one won’t make an impact initially but opening several within a short period of time will.

When your credit has improved, rate-shop within a 30-day Spreading out the inquiries can hurt your score – Most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Typically these are treated as a single inquiry. Inquiries from different types of companies may lower your score due to possible risk.

Buying a home is a big financial commitment. If you are patient and disciplined, you will be on your way to make the best home buying decision for you and your family.

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