Credello: How Raising Your Credit Score Can Help You With Your Mortgage
NEW YORK, March 28, 2023 (Newswire.com) - Credello: Buying a home is one of the most significant purchases you'll make. Unfortunately, not all mortgages are the same, and your credit score's impact on your loan can make all the difference between whether you'll owe thousands more than your neighbor.
If you're wondering how your credit score will affect your mortgage, we're here to help. Here are a few popular questions about credit scores and mortgages that can help you determine the best way to buy your new home:
I declared bankruptcy; can I still get a mortgage?
Yes, but finding a good lender with a competitive rate will be difficult. It may be more beneficial to wait and work on improving your credit score before applying for a mortgage.
If you're worried about this, undoubtedly, your next question might be something along the lines of "When will my credit score improve after bankruptcy?" If you can work on your credit score immediately after a bankruptcy discharge, analysts say you can expect to get approved for a mortgage 18-24 months later. However, the longer you can wait and keep improving your score, the better your interest rate will be. Most mortgages given to those with bankruptcies on their report tend to be two to three points higher than standard market rates.
How does my credit score affect my interest rate?
Your credit score has a big impact on the interest rate you'll be able to get on your mortgage. Lenders use various measures to determine your rate, including your credit score, your debt-to-income ratio, and how long it's been since you paid off your last debt. The higher your score, the lower your interest rate may be.
What are some factors that can affect my credit score?
Your FICO score is between 300-850, with 850 being the best score possible. Your specific score is the sum of five factors, each with different weights that affect your score tally:
- The number of on-time payments: 35%. This is the most significant factor in your credit score. Any payment over 30 days late will affect this, so make sure paying even the minimum payment is done on time.
- Available credit: 30%. How high of a balance do you carry vs. how much total available credit you have. Lenders typically want to see a utilization no higher than 20%, but the best scores have a utilization of 10% or lower.
- Length of credit history: 15%. Lenders want to see you have a strong history of paying back debt.
- The mix of credit: 10%. What type of debts do you have? The best scores typically have a mix of credit cards and loans. However, this isn't a significant factor in your score, so don't worry if you only have a few cards and no loans or only a few outstanding student loans and no credit cards.
- Amount of inquiries: 10%. How often have you applied for new loans or credit in the past few years?
How much can raising my credit score affect my mortgage rate?
Most lenders will only approve applicants with a score of at least 620 unless you have an FHA loan, which may help get applicants with scores of 500 approved. However, applicants with this low a score should expect to have the highest interest rate possible.
As you begin to move into different levels ("poor," "fair," "good," and "excellent"), you can expect to receive offers with lower interest rates, as well as offers from multiple lenders wanting your business.
Overall, it's hard to give specific numbers for interest rates you can expect as the market fluctuates constantly. Generally speaking, you should expect a 2-3 point difference in interest rates between "poor" and "excellent" credit ratings.
The bottom line
Your credit score is a significant factor in your likelihood of getting approved for a mortgage and the interest rate you'll receive. Before looking for a new home, build your credit to get the most competitive rate possible, saving you thousands in homeowner costs.
Credello is a financial tech company offering personal finance tools that simplify financial decisions through personalized, on-demand recommendations — so users can borrow, save, or invest with confidence.
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