Your credit score plays a big role with any financial decision, but what kind of impact does it have on your ability to take out a home mortgage loan? Let me walk you through the role your credit score can take when you decide it’s time to own a home.
What is a credit score?
Before we dive into the role your credit score plays in your home mortgage loan, let’s do a quick crash course in what a credit score is.
Your credit score is a little like a GPA: it’s a cumulative number that measures how successfully you manage your credit. The most common score is from a company called FICO and uses a 300 to 850 point score range and the higher the number, the better. Learn more about what a good credit score is here.
FICO doesn’t disclose how exactly they calculate these scores but we do know they are based on information in your credit report and weighted various criteria like payment history, amount owed, length of history, new credit, and types of credit used. The most important factor that goes into calculating your credit score is the simple record of whether you’ve paid your bills on time.
Role of a credit score before the mortgage
It is simple: borrowers with higher credit scores tend to get lower home mortgage loan interest rates than borrowers with low credit scores. Lenders also like borrowers with low balances, a mix of credit-based purchases like a car, revolving loans like credit cards, and a history of paying on time.
Don’t be discouraged if your credit score isn’t as high as you would like it to be. There are many ways to improve your credit score. Your credit score is also only one factor in your lender’s evaluation of you for a home mortgage loan. Mortgage lenders will also look at your recent work history to see if you have had a steady income for the past few years and how that could factor into your ability to meet payments. They may also review any tax returns and your assets.
Mortgage rates also vary drastically from lender to lender and depending on each individual situation. Learn more about Bankers Trust’s Home Mortgage Rates here.
Changes to a credit score when having a mortgage
While paying off your home mortgage loan, continue meeting your monthly payments. Not paying in full or skipping some payments all together can be a big hit to your credit score, making it more difficult to secure a loan down the road. If you are having difficulty paying back a loan or you’re at a point in your life when you could make larger monthly payments, refinancing your loan is also a great option. Learn more about refinancing a mortgage.
Condition of a credit score after paying off a mortgage
Successfully paying off a mortgage can have a positive impact on your credit score for future loans. It proves you have the ability pay off large-sum debt and that you have a track record of good payment history. This will result in a higher credit rating for the future, increasing the chance of receiving a better loan or interest rate down the road when you need it.
Your credit score plays a key role in your ability to get a home mortgage loan. Make sure you’re in the right position financially before making the first big step.