The key factor that lenders consider when it comes to determining the amount and rate at which you borrow funds is your credit score. Your credit score is determined by your credit worthiness, or how likely it is that you will be able to repay the amount of money loaned to you. Many people are not aware that your credit score from vary from agency to agency for multiple reasons. There are three major credit bureaus: Equifax, Experian and TransUnion and all report a little differently from one another.
Credit scores can change over time so it’s very important you know what impacts your credit score when you are seeking out a mortgage. Your credit score is typically based on the following:
- Timeliness of payments/payment history
- Amount of total debt
- Overall credit history
- Debt to income ratio (used credit vs available credit)
Credit scores can vary from 300 to 850 and the higher your credit score, the better chances you have at getting approved for a loan. Depending on the reason you are using your credit score, the lender may use different requirements to measure your creditworthiness based on the the industry and type of loan.
When it comes to payment history, the creditor or lender is trying to determine if you will repay the loan on time. If you have a lot of missed payments in the past, the payment history shows it’s unlikely you will keep up with payments on a new loan. Payment history will how accounts in collections and how late your payments were which is consider when determining your credit score.
Your debt to income ratio is a very important factor when it comes to credit score. Maintaining and improving your credit is like a balancing act. You want to have a decent amount of credit available, but you don’t want to use too much of that so it looks like it would be difficult for you to pay off or that you are relying on your credit too much. It’s good to keep the percentage of available credit relatively high especially if you thinking of applying for a new loan or mortgage.
The length of your credit history is also something that new credit users may not have but it’s important to establish. You’ll have to get credit in order to build it, but typically it’s hard to get a new account without any type of credit history. This is the reason why it’s important not to rush into opening multiple accounts when you are first establishing your credit. Hard inquiries can also affect your credit so it’s important not to have too many lenders or creditors checking your credit in a short period of time.
Improving Your Credit Score
One of the first things you can do to improve your credit score is to make sure your payments are made on time. Setting up automatic payments with an online bank account is a stress free way to make sure your bills are paid in a timely manner.
Another way to improve your credit score is to monitor your credit card balances and to keep your spending on them as low as possible. You want to have a majority of your available credit be free versus used.
It is also a good idea to review your credit report to make sure there aren’t any errors or old debts listed that should already be cleared. You can always dispute these charges, and that can raise your score very quickly without spending any money.
Reach Out Now!
If you’d like to know more about how your credit score can affect your mortgage or how we can help you to improve yours, don’t hesitate to contact us here at Family First Mortgage today!