What plays into that Magical credit score number?
How a Low Credit Score Affects Your Mortgage Rate
Your credit score is one of the most important factors that lenders consider when you apply for a mortgage. A low credit score can make it more difficult to qualify for a mortgage, and it can also lead to higher interest rates.
How does a low credit score affect your mortgage rate?
Lenders use credit scores to assess your risk as a borrower. A high credit score indicates that you are a low-risk borrower, while a low credit score indicates that you are a higher-risk borrower. Lenders charge higher interest rates to borrowers who are considered to be higher-risk.
The exact impact of a low credit score on your mortgage rate will vary depending on a number of factors, including your credit score, the type of mortgage you are applying for, and the lender you choose. However, in general, a low credit score can lead to an increase in your mortgage rate of 0.5% to 2% or more.
There’s a ton of information floating around about credit scores and how to make yours better. Some good, some bad, some not real... I'll break down what actually effects it and how to raise it.
1. Payment history
Do you make on-time payments? Even just ONE late payment can drop your score so be sure to pay all your bills on time.
2. Credit utilization
This is possibly one of the biggest factors in figuring your score!
What's the ratio of credit you're using compared to the total amount available?
$100k available with $5k used is better than $5k available with $4k used.
Get it?
3. Age of accounts
The longer your accounts have been open, the better record you have of using credit properly.
Be careful when closing out old credit cards... it may adversely affect your score if they've been open longer.
4. New inquiries
How many times have you applied for credit in the past year?
Applying too many times, even if you don't use or get denied, can throw a red flag to credit bureaus causing your score to drop. Only inquire for new credit when necessary.
There is a special consideration with Mortgage Credit Inquiries. If a credit report is run by a mortgage company and all those within 45 days of the first one, only counts as one inquiry on your report.
5. Types of credit
Revolving credit such as a credit card or rent-to-own will affect your score differently than say, a car or home loan.
These types of credit can help you build if you have no history, but avoid if you have a strong credit history.
So what's the best way to make sure your credit score is as high as possible and stays there?
On-time payments
Low credit utilization %
Keep older accounts active
Limit new inquiries
Be aware of different credit types
How can you get a mortgage with a low credit score?
If you have a low credit score, there are still a number of things you can do to get a mortgage. Here are a few tips:
Shop around for lenders. Different lenders have different lending standards, so it's important to shop around and compare rates.
Consider a government-backed mortgage. Government-backed mortgages, such as FHA loans and VA loans, have more lenient credit score requirements than conventional mortgages.
Get a co-signer. A co-signer is someone with a good credit score who agrees to be responsible for your mortgage payments if you default.
Improve your credit score. If you have time, you can improve your credit score by making all of your payments on time, paying down your debt, and disputing any errors on your credit report.
When you are ready to start shopping for a new home, please use my home search website or App. In the meantime if you need additional information about mortgages, please contact my partner Brenen at CMG Home Loans