Your credit score plays a vital role in being approved for a mortgage loan. A higher score indicates you are responsible and likely to pay off the loan on time. Furthermore, having a good score could qualify you for lower interest rates and better loan terms.
A credit score is a number between 300 and 850 that indicates your financial history and creditworthiness. It’s an integral part of your credit report and calculated by the bureaus using sophisticated scoring models such as FICO or VantageScore.
Obtaining your credit score is simple and free online, with each major bureau offering it (Equifax, Experian and TransUnion). Additionally, you can purchase a copy of your report from each company for an affordable fee.
Enhance Your Credit Before Applying for a Mortgage
Before you apply for a mortgage, it’s wise to work on improving your credit score over the course of 6 months. Doing this will create an established history of timely bill payment and ultimately boost your credit score significantly.
Maintain Your Credit Cards and Lines of Credit
It is wise to maintain multiple accounts, even if you rarely use them. Doing so allows lenders to assess how well you manage debt repayment and the length of time the accounts have been active.
Maintain a low debt-to-income ratio and pay it off as soon as possible
It is essential that you avoid maxing out all of your credit products, which could negatively affect your credit score. The lower your debt-to-income ratio is, the better off you will be financially.
Paying your bills promptly and keeping them below 30% of the total available balance will help maintain good standing with credit bureaus.
If you need to improve your credit before applying for a mortgage, Refresh Financial offers an effective program with no up-front costs that will allow you to begin building it. With their assistance, you’ll get both a complete copy of your report as well as regular reports and resources to help boost it quickly.
Acquiring a mortgage with bad credit is more challenging than it looks, but still possible. Borrowers with poor credit tend to default more frequently on their loan, which is why lenders usually charge them higher interest rates and require larger down payments.
Mortgage loans come in many forms, the most popular being a conventional home loan. These can be provided by banks, credit unions and other lending institutions and generally require that your credit score exceed 620 to be approved for these types of loans.
Some government-backed loans can be approved with a credit score of 500 or lower, provided you make 10% down payment and meet other credit requirements. While these types of loans may not be widely available, they could be an ideal option for first-time homebuyers or those with less-than-stellar credit history.