How Your Credit Score Affects Qualifying for a Mortgage
There are a lot of factors considered when you’re applying for a mortgage, including your employment history and how much home you can afford. One of these factors for mortgage qualification? Your credit score.
A credit score indicates how reliable you are when it comes to utilizing and paying back credit. A mortgage underwriter will examine your credit history to determine what risk you pose to the bank. Your credit history affects the mortgage application process in two key ways: if you qualify for a mortgage, and what your mortgage rate will be.
What Credit Score Do You Need to Buy a House?
The short answer is, it depends. What credit score you need to buy a house is determined by what mortgage you are applying for. It also may be affected by what percentage of the home cost you are willing to pay as a down payment. For example, an FHA Loan requires you to have a credit score of at least 640, but a conventional loan like a Fixed Rate Mortgage may require a higher score.
Even if you have the credit score needed for a mortgage, your score will still affect your rate. Having an excellent credit score, such as a score of over 760, may help you to qualify for better interest rates on your mortgage, meaning you’ll pay less over time.
Wondering what mortgage fits your credit score? Meet with a Mortgage Development Officer or speak to one over the phone at 855-684-4968 to learn more.
What Affects Your Credit Score?
So if you need a good credit score for a mortgage, what affects it? There are 5 main factors about your financial history that make up your credit score:
- Payment history: If you have made previous credit payments on time
- Amount owed: What amount you have outstanding
- Length of credit history: How long you have been using credit
- New credit: Any new types of credit you have opened recently, and credit inquiries made to open new accounts
- Types of credit used: What mix of credit you have used, such as credit cards, lines of credit, and auto loans
If you’re just starting the mortgage process, you may want to request a free copy of your credit history to determine what mortgage you may be eligible for.
Learn more about how to improve your credit score.
Credit Score Myths and Misconceptions
Your credit score is a major factor in any home purchase. That’s why it’s important to understand a number of credit scoring myths and misconceptions.
Some of the following factors and rules, if ignored, could take you from qualifying for a mortgage now to having to wait 1 to 2 years before qualifying.
If someone has a number of collection accounts, common sense would tell you to pay them off before going to apply for a loan. While it’s true that in most circumstances you will need to take care of these items, you will want to be cautious when doing so. If you wish to purchase a home in the immediate future, you will want to inform one of our Mortgage Development Officers before paying these collection items off.
Myth #1: I should pay off all collection accounts before getting a loan
Keep in mind: It is not uncommon to see a credit score drop substantially from paying off older collection items. This counterintuitive event happens as a result of having the older collection items refreshed with a current date.
Myth #2: I should close any open credit card accounts that have not been used for a while
A major factor in credit scoring is the ratio of credit in use to credit available. This ratio is calculated using the following equation:
When you close open credit card accounts, you eliminate the available credit and thereby affect this ratio. If you were to close a number of open accounts that have no balance, you could negatively impact your score.
Keep in mind: If you plan to buy a home in the near future, we recommend that you wait until after you have completed your home purchase before closing any accounts.
Myth #3: As long as I’ve been pre-approved, making a large purchase won’t affect my mortgage
If you have been pre-approved for a home loan and are making an offer on a house, do not make a large credit-based purchase. Don’t buy a new car or purchase furniture for the house you are buying. Don’t make any large credit moves until you have completed your home purchase.
Keep in mind: New debt could potentially disqualify you for the home loan, even if you have been pre-approved, or, at minimum, could cause delays and even impact your interest rate.
Myth #4: I have no credit score so I can’t get a home loan
While it’s true that having no credit score at all does make things a bit more difficult, it does not automatically disqualify you for a home loan.
At Santander, we have the ability to use what’s called “non-traditional credit.” We can collect payment history on a number of items that don’t typically appear on a standard credit report.
Keep in mind: We can collect payment history for your rent, utilities, phone, etc. to create this nontraditional credit report. Be sure to consult with one of our Mortgage Development Officers.
Myth #5: Shopping around for home loans will hurt my credit score
When lenders pull your credit, it causes an inquiry. Inquiries do have an effect on the score, and multiple inquiries within a short period of time can negatively impact your score. However, as a savvy customer, you will want to consider comparing rates and fees with different lending institutions. The credit bureaus are able to determine when multiple inquiries may relate to the same purpose such that the inquiries generally do not impact your credit score.
Keep in mind: As long as you are comparing loans within a 30-day period, the credit scoring model only counts these multiple credit pulls as one inquiry. But, be warned, this is only the case for installment loans like a car or home loan. If you apply for five credit cards in one week, it is going to count as five inquiries and will probably drop your credit score.
All loans are subject to approval.
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