Are you thinking about buying a home or refinancing your current loan? When you apply for a mortgage, your credit score may be one of the major factors that impacts the interest rate you receive. It’s also one of the most important ways that you can tell your lender that you’re a creditworthy borrower.
Continue reading to learn more about why your credit score matters for your mortgage rate, which credit score is used, how a mortgage could affect your credit and tips on how to improve your credit.
Why Does Your Credit Score Matter for Mortgage Rates?
Think of your credit score like a report card that assesses your history of handling credit. Lenders can look at your credit score and gain valuable insights into your financial past. In the eyes of your lender, the higher your score goes, the lower the probability you may default on the loan, as well as the more likely you are to receive a lower interest rate.
It pays to have a good credit score so that you receive the most competitive interest rates available. A lower interest rate translates into a lower monthly mortgage payment which saves you money over the life of the loan. However, all is not lost with a less than perfect credit score as there are loan programs that have a lower credit score threshold for qualification.
Which Credit Score is Used to Determine Your Mortgage Rate?
Typically, a mortgage lender will use what’s called a tri-merge credit report. This unique report provides the lender with detailed information and scores from all three credit bureaus combined into a single merged report. When using a tri-merge credit report it’s common for lenders to use the middle of three scores and when you have more than one borrower, the lowest of all the middle scores is used for qualification purposes.
How Does a Mortgage Affect Your Credit?
When you apply for a mortgage, it’s important to be prepared for your credit score to temporarily drop by a few points. This happens any time you apply for credit, but the inquiry can disappear after two years. Also, as you make your mortgage payments on time every month it’s possible to experience an increase to your credit score.
Tips on How to Improve Your Credit Score:
If you have a less than perfect credit score, you may want to consider improving your credit score so you can get the most competitive interest rates available.
Here are some tips that may help boost your score:
- Review your credit report for errors. You can access your complete credit report for free from all three bureaus once a year. If you find inaccurate or missing information, report it to the credit bureaus immediately, so the issue can be resolved
- Reduce any debt you owe on your credit cards. Your credit card balances should ideally be below 30 percent of your credit limit
- Make sure to pay all bills on time. Making your payments promptly is a contributing factor towards your credit score. A late payment will remain on your credit report for years to come, but the impact on your score will dwindle over time
- Don’t close any credit cards. A closed account can stay on your credit report and could be a deciding factor when calculating your score
- Don’t apply for any new lines of credit. Taking out new debt or large loans could lower your credit score
Are you ready to move forward with your new home loan? Our experienced mortgage professionals will help you determine which loan program is right for you based on your credit score. Contact us today!