Why Your Credit Score Matters in Mortgage Approval

A home purchase is one of the largest financial commitments you’ll make, but it’s well worth the investment. Though your income, savings and debt-to-income ratio all factor into the mortgage approval process, one number carries more influence over all others: your credit score.

By comparing your credit score and history with a set of criteria, lenders evaluate how financially reliable you are as well as how risky it would be for them to lend you money. A high score can result in improved mortgage terms, while a low one could limit your options — or even block approval altogether.

This article takes a look at why credit scores matter, what lenders are looking for and how you can prepare before applying for a mortgage.

What Is a Credit Score?

A credit score, generally a three-digit number from 300 to 850, is an observation of your credit history. It is calculated based on things like:

• Payment History (35%) – Are your bills paid on time?
• Credit Utilization (30%) – How much of your available credit do you use?
• Length of Credit History (15%) – How long you’ve had your accounts?
• Credit Mix (10%) – Do you have a wide and varied range of types of credit (loans, credit cards, etc.)?
• New Credit Inquiries (10%) – Did you recently seek credit at several sources?

The higher your score, the more financially reliable you seem to lenders.

Why Care About Credit Scores in Mortgage Approval

When you take out a mortgage, lenders want to reduce their risk. Your credit score provides them with a snapshot of how highly you are likely to repay the loan. Here is how it affects the process:

• Loan approval – A lot of lenders will have minimum credit score thresholds. For instance, FHA loans may require a minimum score of 580, while conventional loans may need 620 or better.
• Interest Rates – With a decent credit score you can qualify for lower interest rates, this will add up to tens of thousands saved over the life of your loan.
• Loan Programs – Some government programs (such as VA or USDA) could accept lower scores, but in most cases conventional loans offered at the best interest rates require higher credit scores.
• Mortgage insurance – A strong credit score will earn you lower costs for private mortgage insurance (PMI) if you need to take it out or can help you avoid paying that cost altogether if you put down at least 20%.

Credit Score Ranges: What Do They Mean?

Though each lender has its own requirements, here’s a general guideline:

• Excellent (750–850): The best rates, the widest loan options and the strongest approval odds.
• Good (700 – 749): Competitive rates and a good selection of loans.
• Fair (640–699): Approval is possible, but the interest rates likely will be higher.
• Poor (300–639): There are a limited number of credit cards available at this level, and you might have to work on trying to improve your score before being approved.

Example Of Life: The Strength In Your Credit Score

Now consider two buyers, both of whom seek to take out a $300,000 mortgage:

• Buyer A (Credit Score: 760): Receives a 6.25% interest rate.
• Buyer B (Credit Score: 640): Receives a 7.25% interest rate.

That 1% might sound minuscule, but when compounded over 30 years, it can translate to tens of thousands of dollars more in interest.

How to Raise Your Credit Score Before Applying

If your score isn’t what you’d like it to be, not to fret — there are things you can do to shore up those scores:

• Make Sure You Pay Your Bills on Time – your payment history of bills is the largest factor.
• Less Credit Card Balances – Try to keep utilization at less than 30% of your available credit.
• Don’t Open New Debt – Too many new accounts or hard inquiries can ding your score.
• Look at Your Credit Report – Order your free yearly report to catch errors.
• Extend Your Credit History – Don’t close old credit cards unless you absolutely have to.

A small increase in your score could mean big savings in mortgage options.

Your credit score is more than just a number — it’s the golden key that unlocks the doors of how you own your home. A better score could mean better odds of credit approval, lower interest rates and thousands of dollars saved.

At Monalending, we assist homebuyers with deciphering their credit profile and analyzing the mortgage programs that would best match their self-indulgence. Whether you have a great, good or bad credit score, our staff is here to help you through the entire process!

Thinking about buying a home? Today is the day to find out if you don’t believe you can qualify for a mortgage or want to know how much home you can afford.