If you’re in the market to buy a home, you’ll quickly learn that your credit score matters. Your credit history is one of the most important factors that lenders consider when deciding whether to approve you for a mortgage. In this article, we’ll explain why your credit score matters when you buy a home.
What Is a Credit Score?
Your credit score is a three-digit number that represents your creditworthiness. It’s based on the information in your credit report, which includes your payment history, credit utilization, length of credit history, types of credit accounts, and recent credit inquiries. The most commonly used credit scores are FICO® Scores and VantageScores.
Why Does Your Credit Score Matter When You Buy a Home?
Lenders use your credit score to determine how likely you are to repay your mortgage. A higher credit score indicates that you’re a lower risk borrower, and a lower credit score indicates that you’re a higher risk borrower. Lenders prefer to work with borrowers who have a good credit score because they’re more likely to make their payments on time and in full.
Your credit score can also affect the interest rate you receive on your mortgage. A higher credit score usually translates into a lower interest rate, which can save you thousands of dollars over the life of your loan. On the other hand, a lower credit score may result in a higher interest rate, which can make your monthly mortgage payments more expensive.
How Do Lenders Evaluate Your Credit Score?
Lenders evaluate your credit score using a variety of factors, including your payment history, credit utilization, length of credit history, types of credit accounts, and recent credit inquiries. They may also consider other factors, such as your income and employment history.
Your payment history is the most important factor in your credit score. It accounts for 35% of your FICO® Score and is based on whether you’ve made your payments on time. Late payments, missed payments, and defaults can all hurt your credit score.
Your credit utilization is the second most important factor in your credit score. It accounts for 30% of your FICO® Score and is based on how much of your available credit you’re using. Ideally, you should keep your credit utilization below 30% of your credit limit.
Length of Credit History
The length of your credit history accounts for 15% of your FICO® Score. Generally, a longer credit history is better because it shows that you have a track record of using credit responsibly.
Types of Credit Accounts
The types of credit accounts you have accounts for 10% of your FICO® Score. Having a mix of credit accounts, such as credit cards, auto loans, and a mortgage, can be better for your score than having just one type of credit account.
Recent Credit Inquiries
The number of recent credit inquiries you have accounts for 10% of your FICO® Score. When you apply for credit, the lender pulls your credit report, which results in a credit inquiry. Too many credit inquiries can hurt your score, so it’s important to apply for credit sparingly.
How Can You Improve Your Credit Score?
If your credit score isn’t where you want it to be, there are steps you can take to improve it. Here are a few tips:
Pay your bills on time.
Keep your credit utilization low.
Don’t close old credit accounts.
Apply for credit sparingly.
Check your credit report regularly for errors.
Your credit score is an important factor when you’re buying a home. It can affect whether you’re approved for a mortgage and the interest rate you receive. If you want to buy a home, it’s important to understand why your credit score matters and how it’s evaluated by lenders. By taking steps to improve your credit score, such as paying your bills on time and keeping your credit utilization low, you can increase your chances of getting approved for a mortgage and securing a favorable interest rate.
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