How Your Credit Score Affects Buying Power
Lenders evaluate a number of factors when you apply for a home loan, including your income, current loans, down payment percentage and your credit score.† That score, also known as a FICO score, helps banks determine if you’re a responsible borrower or a risky borrower. And that can influence the type of loan and interest rate you qualify for.
As far as your lender is concerned, the higher your credit score, the better. A history of timely payments, low credit utilization and a long credit history of paying off balances and loans will result in a high credit score. A lower credit score doesn’t necessarily disqualify you from buying a home but you may incur higher interest rates and additional insurance requirements, which means you’ll have a higher monthly payment and will pay more in total through the term of the mortgage.
Building a good credit history takes time—there’s no quick way to boost a credit score. However, there are things you can do to make small improvements ahead of time and make sure things run smoothly when you apply for a home loan:
Don’t open new lines of credit with balances (like an auto or furniture loan) before applying for a mortgage.
Pay down any credit cards or loans if you can, but don’t close the accounts. This improves your debt-to-credit ratio and shows you are a reliable borrower.
Check your credit accounts to be sure nothing is past due. Also make sure there are no outstanding rent, utility or medical bills in your name.
If you’ve missed a payment, pay it as soon as possible and contact the creditor to ask if they can remove the late payment report from your account. If you’ve been a reliable borrower and explain your situation, they’ll often make the adjustment.
Maintain a good debt-to-income ratio by keeping your credit card balances below 25% of the available credit.
Enroll in automatic payments for everything you can to help avoid future slip-ups.