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Understanding Your Credit Score & Its Impact on Your Mortgage

Understanding Your Credit Score & Its Impact on Your Mortgage Eligibility

Your credit score is a three-digit number that indicates your creditworthiness. It ranges from 300 to 850 and lenders use it to help determine mortgage eligibility.

Your score is calculated based on multiple factors that are weighted differently. These include your payment history, how much you owe, how long you’ve had credit and the types of debt you possess.
Credit Score Range

Having a high credit score can make all the difference when applying for a mortgage, saving you money in interest payments over the life of your loan. But understanding what your score means and how it impacts eligibility can be tricky.

Your credit score is calculated by reviewing your payment history, total debts and other factors in your credit report. Experian(r), Equifax(r) and TransUnion(r) collect this information using VantageScore or FICO score formulae to calculate it for you.

VantageScore 3.0 and FICO Score 8 have become the two most widely-used credit scoring models, using a range of 300 to 850 as the standard range that lenders use in 90% of lending decisions, according to Bill Banfield, executive vice president of capital markets at Quicken Loans.

If your credit score falls below 600, it’s wise to do some research before applying for a mortgage. A low credit score can negatively affect the approval of your home loan and even prevent you from getting the best rate available.

Lenders typically view credit scores of 670 or higher as “acceptable” or “lower-risk.” This indicates they have demonstrated responsible credit behavior, such as paying bills on time and keeping debt levels low.

People with credit scores in this range often have more access to loans than those with lower scores, though they may also face higher interest rates and other fees.

There are exceptions to this rule. For instance, if your credit score falls into the “very poor” range, your chances of approval for a home loan approval are generally limited to banks and other institutions that specialize in subprime loans.

People with credit in this range are likely to face more stringent requirements than those with better scores. Furthermore, they may need a cosigner with better credentials or pay a higher down payment – which may prove especially challenging for first-time homebuyers who cannot save enough money for an initial down payment.
FICO Score

A FICO Score is one of the most crucial tools when shopping for mortgages. It accounts for 90% of lending decisions and plays a major role in determining your eligibility to receive a loan and what interest rate you’ll pay.

Your credit score is a three-digit number that summarizes your debt, payments and credit history at one particular moment in time. It serves as an aid for lenders to quickly, consistently and objectively assess your risk level when it comes to understanding credit risk.

Lenders use credit scores derived from data sourced from three major reporting agencies – Equifax, Experian and TransUnion – as well as other sources. Each report will have a different score depending on its content and how often it is pulled.

Generally, the higher your credit score, the easier it will be to qualify for a loan. Furthermore, having a higher score can offer you a lower interest rate on mortgage payments, making it cheaper to service the debt over time.

Once a year, each credit bureau offers free copies of your credit report. With this data, you can monitor and improve your credit score over time.

Positive credit reports and responsible payment habits can significantly boost your credit score, but some people struggle to reach the level needed for mortgage approval due to negative items on their reports or lack of available credit – leading to a low credit score.

Your payment history accounts for 35% of your credit score, and lenders want to see that you have a consistent track record for making payments on time. To maintain good credit, set up automatic payments for bills and make sure all bills are paid promptly each month.

Credit card balances only make up a small part of your credit score, so it’s best to keep them low. Aiming for an overall low balance below 30% can give your score a boost and show lenders you are responsible with money management.

In addition to your credit score, there are other factors that determine your creditworthiness and how much you can borrow. These include the length of your credit history, any open accounts you may have and how often you apply for new credit.
VantageScore

Lenders and other creditors, including mortgage investors, use credit scores to assess borrowers’ creditworthiness and decide if they will extend credit. Typically, they look at FICO scores; however, there is another type of score lenders might take into account: VantageScore.

VantageScore is a newer credit scoring model being promoted by three major credit reporting agencies: Experian, Equifax and TransUnion. It was created as an alternative to the dominant FICO credit scoring system that lenders have traditionally relied on.

VantageScore 3.0 incorporates six factors into one score, each having a distinct impact on your credit rating. Payment history accounts for 40% of the overall score while age/type of credit, total balances/debt, available credit and recent credit behavior also play a role.

Payment History (Highly Influential): How long you have been making payments on time has a major effect on your credit score. Late or missed payments can lower your overall rating; however, if you make all your payments promptly and pay down all debts, chances are good that it will improve.

Total Balances and Debt (Moderately Influential): Your total debt obligations, such as credit card balances, have a substantial effect on your score. A high debt-to-income ratio can have an adverse effect on your score; so try not to take out any new loans that will put you over the debt limit.

Available Credit (least influential): Your available credit can have an impact on your credit score, so try to keep utilization low and balances below 30% of your limit on credit cards.

Deduplication: Both FICO and VantageScore perform deduplication when reviewing your credit history. However, FICO utilizes a 45-day period to deduplicate inquiries, while VantageScore only looks at applications within a 14-day window.

Hard Inquiries: Multiple hard inquiries in a short period of time can have an adverse effect on your credit score. VantageScore allows you to shop around for loans from multiple providers simultaneously and only counts one of these inquiries against you.
Credit Report

Your credit score is one of the primary factors lenders use when assessing mortgage eligibility. It helps them decide if you are a reliable risk for their money, so it’s essential to comprehend how it’s calculated.

Your credit score is determined by information in your credit report, which provides a comprehensive record of your financial history. Credit reports are typically provided to three nationwide consumer reporting agencies (CRAs) — Equifax, TransUnion and Experian — by creditors such as banks, insurance companies or other lenders.

Each credit report contains a variety of information you may not expect to see, such as personal details, details on your lines of credit and public records like bankruptcies and tax liens.

Always review your credit reports to guarantee they are accurate and complete. Doing so can help prevent identity fraudulence and alert you to any mistakes that could negatively affect your creditworthiness.

Your credit mix – or the accounts you have open – plays a significant role in determining your credit report. This could include credit cards, retail accounts, installment loans, finance company accounts and mortgages.

When applying for credit, how frequently you have used those accounts is also key. Lenders will look more favorably upon you if you’ve recently used your credit and have a long record of being responsible with your payments.

Other elements on your credit report that could impact mortgage eligibility include your debt-to-income ratio and payment history. A lower ratio means less of your monthly income goes toward paying down debt, potentially opening the door for better loan rates.

Your employment and income can be seen as part of your credit history, so it’s essential to stay current. To do this, request an updated copy of your credit report and review it thoroughly to confirm all information provided.

Once a year, each of the three national consumer reporting agencies offers free credit report checks. You may also request any errors be corrected at no charge.

Applying for a new line of credit can be seen as a hard inquiry on your credit report and could negatively impact your score. Therefore, only request new credit when necessary – never more than what you can comfortably afford.

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