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.

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