As a potential homebuyer, understanding your credit score is crucial in the mortgage application process. This guide aims to educate you on the factors influencing your credit score, helping you make informed decisions as you prepare for homeownership.
Key Takeaways
- Your credit score is a crucial element of the mortgage application process.
- FICO scores, ranging from 300 to 850, are the most widely used in mortgage lending.
- Five key factors determine your credit score: payment history (35%), amounts owed (30%), length of credit history (15%), credit mix (10%), and new credit (10%).
- Different types of mortgages have varying credit score requirements.
- Your credit score can influence the interest rate you're offered on a mortgage.
- Regularly monitoring your credit reports helps you stay informed about your credit status.
What Is a Credit Score?
A credit score is a three-digit number, typically ranging from 300 to 850, that represents your creditworthiness. One of the most widely used credit metrics in mortgage lending are FICO scores, created by the Fair Isaac Corporation. Lenders use this to assess the potential risk of lending money or extending credit to consumers.
The 5 Key Components of Your FICO Credit Score
According to myFICO.com, the consumer division of FICO, five main factors contribute to your credit score. Let's explore each of these in detail.
1. Payment History (35% of Your Credit Score)
The most significant determinant of your credit score, this accounts for 35% of the total, and considers whether you've paid past credit accounts on time.
What's Included:
- Credit Card Payments
- Retail Account Payments
- Installment Loan Payments (Car & Student Loans, for Example)
- Mortgage Payments
Importance for Homebuyers
Mortgage lenders pay close attention to payment history, as it indicates how likely you are to make regular, on-time mortgage payments.
2. Amounts Owed (30% of Your Credit Score)
The second-most important factor is the amounts you owe, comprising 30% of your credit score. This includes your credit utilization ratio—the amount of credit you're using, compared to your limits.
What's Included:
- Credit Card Balances
- Installment Loan Balances
Importance for Homebuyers
High credit utilization might signal financial stress to lenders. However, having existing loans doesn't automatically disqualify you from getting a mortgage.
3. Length of Credit History (15% of Your Credit Score)
The length of your credit history accounts for 15% of your credit score. This considers how long you've been using credit.
What's Included:
- Age of Your Oldest Account
- Age of Your Newest Account
- Average Age of All Your Accounts
Importance for Homebuyers
A longer credit history provides more data for lenders to assess your creditworthiness over time.
4. Credit Mix (10% of Your Credit Score)
Your credit mix, or variety of types, comprises 10% of your credit score.
What's Included:
- Credit Cards
- Retail Accounts
- Installment Loans
- Finance Company Accounts
- Mortgage Loans
Importance for Homebuyers
A mix of credit types demonstrates your ability to manage various financial obligations, which lenders view positively.
5. New Credit (10% of Your Credit Score)
The final 10% of your credit score is determined by your new credit activity.
What's Included:
- Number of Recently Opened Accounts
- Amount of Hard Inquiries on Your Credit Report
Importance for Homebuyers
Opening several new credit accounts in a short period may be viewed as risky behavior, especially when you're planning to apply for a mortgage.
Credit Score Ranges & Mortgage Options
Different types of mortgages have varying credit score requirements. Here's a general overview:
- Conventional Loans: Often require a minimum credit score of 620.
- FHA Loans: May consider scores as low as 500 with a larger down payment, or 580 with a smaller down payment.
- VA Loans: While the VA doesn't set a minimum, many lenders look for a score of at least 620.
- USDA Loans: Typically require a minimum score of 640.
It's important to note that these are general guidelines. Specific requirements may vary, depending on the lender and other aspects of your financial profile.
The Relationship Between Credit Scores & Mortgage Rates
Your credit score doesn't just affect your ability to get approved for a mortgage; it also influences the interest rate you may be offered. Generally, a higher credit score helps lead to more favorable interest rates. Even a small difference in interest rate can result in significant differences in total interest paid throughout the life of a loan.
Monitoring Your Credit
Regularly reviewing your credit reports helps keep you informed about your credit status and identify any potential errors. The Federal Trade Commission provides information on how to obtain free credit reports from the three major credit bureaus.
Experts at Contour Mortgage Help You Navigate the Home-Buying Process
Understanding the factors influencing your credit score is an important step in preparing for homeownership. At Contour Mortgage, we're committed to providing educational resources to help potential homebuyers navigate the complexities of the mortgage process.
Remember, improving your credit score is a gradual process that requires consistent financial habits over time. If you have questions about how your credit score might affect your mortgage options, consult one of our qualified mortgage professionals.
Contour Mortgage has been helping homebuyers qualify for various types of mortgage loans for more than three decades. Contact Us today to learn about the loans we offer, or apply for pre-approval now.
