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.
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.
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.
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.
Mortgage lenders pay close attention to payment history, as it indicates how likely you are to make regular, on-time mortgage payments.
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.
High credit utilization might signal financial stress to lenders. However, having existing loans doesn't automatically disqualify you from getting a mortgage.
The length of your credit history accounts for 15% of your credit score. This considers how long you've been using credit.
A longer credit history provides more data for lenders to assess your creditworthiness over time.
Your credit mix, or variety of types, comprises 10% of your credit score.
A mix of credit types demonstrates your ability to manage various financial obligations, which lenders view positively.
The final 10% of your credit score is determined by your new credit activity.
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.
Different types of mortgages have varying credit score requirements. Here's a general overview:
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.
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.
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.
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.