Credit & your home loan
How Your Credit Rating Affects Your Home Loan
When you apply for home loan, your lender will request a lot of information, including your current credit score. It will be weighed with other factors to determine the interest rate you will pay on your mortgage. Where does the credit rating come from and what can you do to boost your score?
What Is a Credit Score?
A credit score is a number ranging from 300 to 850 based on information in your financial history that measures your risk level to lenders. They need to know if you will pay back the money they loan to you. The score changes based on your activity in five categories:
How Do You Compare?
In general, a credit score above 700 is more attractive to lenders, while anything below 620 could make it harder to get a loan. According to NerdWallet, the average score was 695 in 2015 (latest data available). About 22% of scores fell below 600 in 2015; 23.3% ranged from 600 to 699; and 54.7% were 700 or above.
Lenders Look at More Than Your Credit Score
Where home loans are concerned, your credit score is just one piece of the puzzle. Lenders do use your score to help make lending decisions, but they consider other factors as well.
Since a credit score doesn't indicate whether you can afford to make your payments, lenders also look at your current and past employment, other debts you may have, and assets you have accumulated, which could affect your down payment.
There isn't typically a cutoff score under which you need not apply for a loan. And a good credit score does not guarantee your loan will be approved. You could have a good credit rating but owe too much in other debts. What is debt-to-income ratio?
Keys to Improving Your Credit Score
Take heart if your score is on the lower side, because you can take steps to improve it. Take note if you have a higher score – a few miscues could result in a lower number.
It's important to monitor your credit score regularly. You are entitled to a free credit report from each of the three major credit reporting agencies every year (see below for agencies). To improve your score over time:
- Pay your bills on time. Automatic bill pay might help you avoid missing deadlines.
- Be aware of your total debt as well as credit utilization. That's the ratio of your credit card balances to the credit limits on those cards. Auto loans and school loans with specific terms are viewed more favorably by credit bureaus than revolving credit, such as department store cards.
- Think before closing old accounts, since the length of your credit history matters.
- Take steps to have errors on your report corrected or removed. Be prepared since this process takes patience.
You'll be glad you made the effort to boost your credit score. A lower interest rate on your home mortgage could save thousands of dollars over the life of your loan. Also, a good credit rating can translate into lower homeowners insurance premiums and better interest rates on your credit cards and other loans.
What's Not in Your Credit Score
While your credit score is a snapshot of your financial life, it does not reveal the whole picture. Many things are not factored, including:
- Age, race, religion, national origin, gender or marital status as prohibited by federal law.
- Salary, occupation, employer or employment history, though lenders may consider this information while considering your loan application.
- Any requests for your credit report initiated by you, employers, or inquiries made by lenders in order to make you a "pre-approved" credit offer or to review your account with them.
- Where you live.
- Child/family support obligations.
- Interest rates you may be paying on other credit accounts.
- Whether you are participating in credit counseling.
Three Major Credit Bureaus
There are three major credit bureaus that collect data on your financial life and calculate a number that changes over time based on your activity. Scores vary depending on the information available, which explains why getting your score from each of them could result in three different scores. Depending on the size of your home loan, lenders may request your credit report from all three agencies when considering your application.
You can learn more and take steps to get your credit score or correct wrong information from any of the three major credit bureaus: