It’s common to hear that you need a good credit score when buying a home, but it’s not always clear why. When obtaining a mortgage, your credit score will play a large role in the process. Whether that be applying for a loan or trying to get pre-approved on a mortgage, having a good credit score will shore the lender that you are a trustworthy borrower.
Before you worry about your credit score, we have provided the answers to what credit is, how it impacts a mortgage, and ways you can improve your credit score.
What is credit?
In short, credit is the promise to pay something back. How good your credit is can be defined as a score. A credit score is an assessment of how reliable a borrower is to pay back a debt. When looking at a credit card, you may be allowed a certain credit line or the amount you are allowed to spend. Within that credit line, you can purchase items and services with a swipe of a card. The difference between a credit card and a debit card is that a credit card is promised money and doesn’t actually come out of your account when you swipe. When you use credit, you are making a promise to pay the amount back. This can be beneficial when you need to pay for something but the paycheck doesn’t come in for another week. This said it is important never to pay for something that you don’t have money for. You may not be charged immediately but you will still owe that money.
When your credit score is being calculated, it takes into consideration how much credit is used within your allowed credit line, missing payment, credit inquiries, length of credit, and total credit accounts. This will give you a total score out of 850 with scores above 690 being considered “good” and scores above 720 considered “very good”.
How will a good credit score help with a mortgage?
Your mortgage interest rates and in direct correlation with your credit score. This said, having 100 more points on your credit score could save you thousands and vice versa. Saving money is always a priority and knowing how your credit score can affect your mortgage is key
Credit and Lenders
Lenders will almost always look at a borrower’s credit score to determine any risks. A borrower with a lower credit score will post more risk to the lender versus one with a higher credit score. From a lender’s point of a view, a borrower with a higher credit score is more likely to pay in full and on time. Having a good credit score will give you an edge in the home buying process and can help you get your dream home in a seller’s market.
Credit and Mortgage Rate
A mortgage rate is defined as the percentage of interest applied to a mortgage. The higher the rate, the more money the borrower will have to pay. Your mortgage rate is affected by your credit score. For example, if you start off with a good credit score, your mortgage rate will be set at a certain percentage. Should your credit score drop, the percentage may increase. And, should your credit score improve, your mortgage rate may decrease, costing you less money.
Credit and Pre-Approval
Pre-approval is not mandatory but can certainly help when buying a home. Since COVID-19, the housing market has geared toward the sellers making it more competitive for a buyer. Getting a pre-approval won’t guarantee you get the house, but, it will help you stand out from other candidates. A pre-approval is a letter from a lender stating that they are tentatively willing to lend you money for a home. In many cases, a seller wants a pre-approval before they see your offer on the home because it lets them know you are already in the running to afford the house.
Applying for a pre-approval will mean your credit score, income, assets, and debts will be evaluated. A good credit score will increase your chances of getting a pre-approval.
What improves a credit score?
Building your credit is imperative and can be improved by the following steps:
- Never miss a payment. Always pay your bills on time and in full
- Avoid having too many credit card accounts. Creditors want to know you can manage multiple accounts responsibly, however, too many can get overwhelming. It is better to have fewer accounts and never miss a payment than have multiple accounts and lose track of payments.
- Be Patient. The longer your credit history the better, especially if it’s properly managed.
- Avoid credit-seeking activity or inquires in a short period of time.
- Be aware of your revolving utilization. How much you owe your lender plays a large role in your score. The amount you use of your allowed credit line is taken into consideration.
How We Can Help!
Not knowing what you qualify for can be overwhelming. We are here to help you know your options. Partnering with a mortgage broker can help you when applying for loans, seeking pre-approval, and getting a good mortgage rate. Dee Ayers is a mortgage broker with over 25 years of experience. Contact her today and get ready to buy your dream home!