In the home buying process, the mortgage lender will check your credit and determine if you qualify. Maintaining strong credit shows that you pay back your debts and use your credit wisely. If you have strong credit, you’re more likely to be approved for a mortgage and a lower interest rate on your home.
Understanding the differences between credit report and credit score
Your credit report shows your history of paying back. This is based on your credit cards, car loans, and even student loans. A credit report does not contain your credit score. Negative impacts on your credit such as repossessions or bankruptcies will appear on your credit report.
Your credit score is what mortgage lenders use to determine how safe or risky you are as a customer. A FICO Score is the most common number lenders use to make credit decisions.
Here are the key factors affecting your credit score:
30% Debt (how much you owe)
35% Payment History
15% Length of Credit History
10% Types of Credit
10% New Credit
Here are 3 tips to improve your credit score
1. Pay down your debt
As shown above, debt takes up 30% of your FICO score. Having a lot of debt will hurt your chances of getting a good interest rate. Lenders will also look at your debt-to-income ratio (DTI). This shows how much debt you have compared to the amount of income you earn. The lender will then look at the minimum payments required for each of your debts and calculate a ratio based on your gross income. Therefore, before applying for a mortgage, spend some time paying down your debt.
2. Don’t add new debt
While improving your credit, avoid taking on new debts. Try not to make any large purchases if it’s not necessary. Set a monthly budget so you can avoid overspending and taking on any new debts.
3. Request a credit limit increase
If most of your credit cards have low limits, now is a good time to consider asking for a limit increase. The credit company will most likely agree to raise your limit if you’ve been paying your bills on time. Increasing your limit will improve your credit utilization ratio. The utilization ratio is the debt piece of your FICO score (30%). The lower your ratio is, the better mortgage loan you will qualify for.
Managing your credit score can seem overwhelming. Remember to use these tips when applying for a mortgage. If you’re looking to learn more about credit, mortgages, and how the real estate industry works. Be sure to follow us on Instagram @mortgagechicks for daily mortgage information.