Knowing your credit score for a mortgage is an important first step when buying a home. Your credit score not only helps determine whether you’ll get a mortgage, but also determines how affordable your monthly payments could be.
Every day, we help mortgage applicants fully understand their credit and personal finances to empower themselves through homeownership. We show people that it is possible to buy a home, even if your credit history isn’t perfect.
That’s why we’ve written this two-part blog series to give you a basic understanding of how you can take control of your credit and buy a home.
In Part 1, I’m breaking down the basics to prepare you for a smooth mortgage application. Be sure to stay tuned for part 2 of this blog for an even deeper dive into what you need to know about getting ready for a home loan.
Know your credit score before you apply for a home loan
Before you even apply for a mortgage pre-approval, you must have a realistic understanding of your financial situation.
Your credit score is a key part of your financial picture. Lenders use your credit score and history to measure how risky it would be to give you a loan. That’s why it’s vital that you obtain a clear understanding of where you stand, credit-wise.
Before you apply for a mortgage, get a copy of your credit report so that you can review it. You can get a free copy of your credit report by visiting annualcreditreport.com.
In addition to this free resource, we’re available to walk you through your credit report so that you know exactly what it means. Don’t hesitate to reach out and learn more about how we can help you understand your credit score for a mortgage.
What’s in your credit report?
Your credit report contains personal information that helps lenders and other potential creditors determine your creditworthiness. In short, it contains all of your credit histories in one place.
Here’s what you can expect to see in your credit report:
- Your personally identifiable information – also knowns as “PII”. This information contains things like your full legal name, Social Security Number, current and prior addresses, and date of birth.
- All your credit accounts – a history of your credit cards, loans, account balances, and payment details are all found here.
- Credit inquiries –every time you apply for a line of credit, your credit is “pulled,” meaning that you’ve permitted for your report to be accessed. Beware that whenever you do this, you risk decreasing your credit score.
- Public records and collections – any unpaid bills, delinquent accounts, bankruptcies, municipal and county court records, and collections activities will show up here.
If this is your first time reading your credit report, it’s a good idea to speak with a home loan professional who can explain what your credit score for a mortgage means.
What makes up my credit score, anyway?
There are a few factors that go into compiling your credit score. The good news is that you have control over all of them. Even better, you can take steps to improve your score and credit history.
Here is a list of items that go into making up your credit score:
- Payment history – 35%. Are you on time or late with your payments? Being timely (and even early) with your payments will raise your score, whereas late payments will lower it.
- How much credit you’re borrowing – 30%. Do you have many credit cards with high balances in relation to the credit limit? Do you have multiple car loans, or have you co-signed a loan for someone else? The amount you’re borrowing could negatively affect your credit score. However, paying down credit card balances can have an almost immediate impact on your credit score.
- How long you’ve had a credit history – 15%. Are you a credit newbie, or do you have an established credit history? It all goes into determining your score.
- The overall mix of credit you hold – 10%. Lenders want to see a healthy mix of credit borrowed. An example of a healthy mix would be regularly paid student loan payments, one or two credit cards with low balances, and a car loan that’s paid on time.
- The amount of new credit – 10%. Opening several credit accounts in a short period of time can indicate higher risk, and having too many credit inquiries on your report can lower your score.
Ask questions when going through this process. The mortgage professional you work with should be happy to explain things in a way that gives you a better understanding of how to take control of your credit.
This is just the beginning…
Have more questions? That’s why we’re here!
We’ll be following up soon with Part 2 of what you need to know about your credit score for a mortgage. In that, we’ll cover the top 3 credit do’s and don’ts to keep you in great financial shape.
Even if your credit history isn’t perfect, it is possible to get a mortgage, but it will require partnering with a mortgage professional who knows how to get you approved. Contact us with any questions that you have. We’ll help get you home!
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