When you’re ready to buy a home, one of the most important factors that lenders will consider is your credit score. Your credit score is a numerical representation of your creditworthiness, based on your credit history, outstanding debts, and other factors. In this blog post, we’ll discuss why your credit score is so important when applying for a mortgage and how you can improve it.
- Your credit score affects your interest rate Your credit score plays a significant role in determining the interest rate you’ll pay on your mortgage loan. Generally, the higher your credit score, the lower your interest rate. This means that a higher credit score can save you thousands of dollars over the life of your loan.
- Your credit score affects your loan eligibility In addition to impacting your interest rate, your credit score also affects your eligibility for a mortgage loan. Lenders use your credit score to assess the level of risk associated with lending you money. If your credit score is low, you may not qualify for a loan, or you may be required to make a larger down payment or pay a higher interest rate.
- Your credit score can impact your mortgage insurance premium If you’re unable to make a down payment of at least 20% of the home’s purchase price, you’ll likely be required to pay for mortgage insurance. The cost of mortgage insurance is based on your credit score, among other factors. A higher credit score can help you qualify for lower mortgage insurance premiums, saving you money over the life of your loan.
- Your credit score can impact your closing costs In addition to impacting your interest rate and loan eligibility, your credit score can also affect your closing costs. Lenders may charge higher fees to borrowers with lower credit scores, which can add up to significant costs at closing.
How to improve your credit score If your credit score is lower than you’d like, there are steps you can take to improve it before applying for a mortgage loan. Some tips to improve your credit score include:
- Paying your bills on time
- Paying down high credit card balances
- Avoiding opening new credit accounts
- Checking your credit report for errors and disputing any inaccuracies
- Working with a credit counseling agency to develop a debt management plan
