If you are planning to apply for a mortgage loan, a few factors influence credit score. This number can affect your ability to get a loan and also the interest rates. Therefore, you need to understand the factors that determine your credit score.
Thus, you know what you can do to optimize and improve your score. Generally, different credit bureaus use different methods to calculate the score. However, they still look at the same five factors that influence credit score, including:
Payment History (35% of Your Overall Score)
Your history of on-time payments can improve your credit score while late payments can have a negative effect. When it comes to late payments, a few factors will be taken into account. These are the frequency and severity of your late payments. For example, a payment that is 60 days late will have a more detrimental effect than the one that is 30 days late. Hence note that your most recent late payments will cause you to lose more points than previous late payments.
Utilization Rate (30% of Your Overall Score)
The utilization rate is the ratio of your credit balance to your available limit. We take into account the rate of your individual cards and your overall cumulative available credit. A balance-to-limit ratio that is below thirty percent may increase your credit score, whereas a ratio that is more than thirty percent may have a negative effect.
Length of History (15% of Your Overall Score)
The length of your credit history is also a factor that affects your score as well. This means that your established credit accounts can be good for your score. By keeping your credit accounts open even though you have paid all of them off, your credit score can also be improved. That is because a new credit account can reduce your length of credit history, which leads to a lower credit score for the first twelve months. However, the account that has been opened for over twenty-four months will have a more established length of credit, thus improving your credit score as a result.
Credit Mix (10% of Your Overall Score)
The types of credit that you have is also taken into consideration when determining your score. In general, a mix of various credit types is more advantageous than one single credit type. For example, if one person has an auto loan, a revolving credit card, and an installment loan, then this person is more likely to have a better score than others who only have revolving credit cards.
Inquiries (10% of Your Overall Score)
A “hard” inquiry, such as when a lender pulls your credit, can have a bad effect on your credit score. As a result, when you apply for a new loan, this hard inquiry may lower your score for up to twelve months. However, “soft” inquiries, such as when your potential employer check your credit or when you check your own credit, are not harmful to your score. Note that multiple inquiries requested for a single account will only count as one.
What Credit Score Do I Need to Purchase a House?
Now that you understand what factors affect your credit score, the question that remains is: what credit score is required to buy a house? Below is a range of credit scores evaluated by mortgage lenders that you can use as a reference:
800 – 850: Excellent
700 – 800: Very Good
680 – 699: Good
620 – 679: Fair
580 – 619: Poor
500 – 579: Bad
499 and Lower: Very Bad
Contrary to popular belief, it is not mandatory to have a full or perfect score to qualify for a mortgage loan. That being said, having a higher credit score is always more advantageous as it can get you a lower interest rate and monthly payment. Most mortgage lenders tend to favor people with higher credit scores than those with low ones.
Keeping these factors that influence credit score can help you plan in a better way. If you’re looking for a trustworthy and reputable mortgage broker, Aceltis Group is here to help. Contact us today for more information.