Credit Score Impact on Mortgage Rates

Real Estate Information

Credit Score Impact on Mortgage Rates

When buying real estate, it is important to know about the credit score impact on mortgage rates.
Understanding your FICO score and how your credit report affects your home buying process:

Home buyers who are seeking a mortgage find out early on that their credit score plays an important part in the home buying process and in determining the interest rate that a lender offers.

Credit score impact on mortgage rates – What is a credit score?

A credit score is a number that lenders use to determine the risk on lending money. Experience has shown lenders that borrowers with a higher credit score are less likely to default on a mortgage loan.

How is credit score calculated?

All 3 major credit reporting agencies using special software that analyzes your credit score with data collected over years. The three major credit reporting agencies don’t necessarily use the same scoring software, so don’t be surprised if you discover that the credit score that each credit reporting agency generates for you might vary.

Which parts of a credit history are most important to become relevant for credit score impact on mortgage rates?

  • 35% your Payment History
  • 30% amounts you Owe
  • 15% length of your Credit History
  • 10% types of Credits used
  • 10% new Credits

Your payment history plays also a very important part:

  • The number of accounts paid as agreed
  • Negative public records or collections
  • Delinquent accounts such as total number of past due items, how long you have been past due and how long it has been since you had your last past due.

What you owe on your accounts:

  • How much you owe on your current accounts and the types of accounts that show a balance
  • How much of your revolving credit lines you have used such as overextended accounts
  • Amounts that are left on your installment loans vs. the original balances – to make sure that you are paying them down consistently
  • Number of zero balance accounts

Credit score impact on mortgage rates – Length of your credit history:

  • The total length of your credit report
  • The length of years since your accounts were opened
  • The time that’s passed since the last inquiry on your account
  • The longer your credit history, the better your scores. It takes time to develop a credit history
  • The type of your credit accounts:
  • The total number of your accounts and types of accounts such as installment, mortgage or auto loans. A mixture of account types usually generates better scores than reports with only accounts for credit cards

Your new credit:

Number of accounts you’ve recently opened and the proportion of new accounts to total accounts, the number of recent credit inquiries, the time that’s passed since recent inquiries or newly-opened accounts, if you’ve re-established a positive credit history after encountering payment problems and in general, checking to make sure you aren’t attempting to open numerous new accounts.

What is a good credit score?

Credit scores are usually ranging from 340 to 850. The higher your score is, the better your credit and a lesser risk for your lender. When your credit score climbs most likely the interest rates your lender is offering you are most likely to decline.
Borrowers with a credit score over 700 are typically considered excellent borrowers, but don’t be discouraged if your score is lower there are many different mortgage and loan programs out there for almost everyone.

The middle score:

Your lender will most like pull all reports from the major credit agencies Transunion, Experian and Equifax and use the middle score that will determine your loan terms.

What NOT to do during the home buying & loan process:

There are most definitely some things you should avoid during the home buying process such as:

Late payments – You should always, but in particular during the home buying process make absolute sure that you are not late on any payments. A late payment will effect your current credit score. A loan underwriter will recognize this and your loan approval could be terminated.

Don’t buy anything on Credit – Wait until you have closed on your new home and funded on the loan, before buying new furniture for the home on credit! Don’t put anything on credit during the home buying process.

Don’t quit your job during the home buying and loan process. Many underwriters are required to do last minute job verifications before loan documents go out to the title company for a closing.