How Your Credit Score Affects Your Mortgage
Your credit score shows lenders how likely you are to make payments on time and manage your finances. In general, the higher your credit score is, the better your mortgage options will be.
Why are credit scores important?
Your credit score, also known as your FICO score — named after the company that created the scoring model — helps lenders understand how you manage your finances and level of risk to the lender. Combined with other healthy financial habits (like having a low debt-to-income [DTI] ratio and a strong financial history), a higher FICO score could mean better loan options and lower interest rates. On the other hand, a lower FICO score could make it harder to qualify for certain loans and result in higher interest rates.
What is a good credit score?
When you apply for a mortgage, we look at your credit score from the three major credit agencies (Equifax, Experian and TransUnion), and use the middle score for your application. If you are applying with another person, we will take the lower, middle score of the two. All FICO scores fall somewhere between 300 (lowest) and 850 (highest). Generally, a score over 700 is considered good, while 620 or lower could make it harder to qualify for certain loans. If your score isn't the greatest, don't worry — there are plenty of things you can do to improve it.
Did you know?
Inquiries made in the 30 days leading up to your scoring won't affect your FICO score.
How can you improve your credit score?
1. Make timely payments
One of the easiest ways to improve your credit score is by paying your bills and debts on time.
2. Pay down your debt
Make sure your debt is lower than your total available credit. If it's not, consider making larger payments to bring your debt down.
3. Vary your credit products
Effectively managing a mortgage, car loan and one credit card may help your credit score more than having 3 or 4 credit cards because it shows your ability to manage different types of loans.
4. Build a credit history
You can improve your score by having an established credit history. Be mindful of how many accounts you have, when you opened them and how often you use them.
5. Minimize new accounts and inquiries
An inquiry is added to your report when you apply for a credit card or loan, which in turn can affect your credit score. Consider only applying for new credit and loans you intend to use. Remember, activity on joint or co-signed accounts will also affect credit scores. For example, if you co-sign for a relative and they default on their payments, your credit score will also be affected.