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If you’re applying for a mortgage, your credit score plays a vital role. Strong credit means that you have a strong chance of being approved for a mortgage loan. Less-than-good credit could mean that you have work to do to improve your standing before you can qualify. Want to learn more about the connection between your credit score and your mortgage application? Read on.
Your Credit Score
When buying a home, potential lenders will look at a variety of factors, including your credit score, the property you want to purchase, and the source of your down payment. All of these factors work together to influence a lender’s decision to give you a loan, and they also impact the interest rate and ultimately the price of your loan.
Think of your credit score like a numeric grade that shows where your credit history stands at a specific point in time. Your credit score is based on the debts — such as credit card and loan balances — listed in your credit report. Your credit report will list things like account balances, payment history, credit limits and age of accounts. Each factor is given a different weight in calculating your credit score.
Want to know where you stand? There are many websites you can visit to find your credit score. If you’re a Mr. Cooper customer, you can learn more about your credit score by simply logging into your online account. You can also search online to request a free copy of your credit report. If you have concerns about your score, your credit report can help you identify issues that may be hurting your score.
How Much Debt You Have
In addition to the amount you owe on your credit cards, your credit score is also impacted by your credit utilization, or your balance compared to your credit limit. It’s better to have lower credit utilization because it shows that you are responsible with your credit. Experts suggest you keep your balance at or below 30 percent of your credit limit. For example, if you have a credit card limit of $2,000, then your balance on that card should be below $600 at all times. You’ll likely notice your credit score decreasing as your balance exceeds the 30 percent threshold. And if you regularly max out your credit cards, your credit score could drop significantly.
Your Debt-to-Income Ratio
Your debt-to-income (DTI) ratio is what determines whether you are able to afford a property you’re looking to buy. Your DTI also helps your lender determine if you make enough money each month to cover your bills and expenses. This measurement is very important to potential lenders, so be sure your DTI is well balanced.
Credit Scores: Summing It Up
Your credit score plays a big role in getting a loan, so it’s important to know where you stand. Raising your score can take time, but there are things you can do to get started — such as paying your bills on time and monitoring your credit utilization and limits. Plus, taking the time to work on raising your credit score can be great preparation for managing a mortgage.
