Why Credit Matters When Buying
I know, you've probably heard it a million times: "Improve your credit score today!" or "Boost your credit with these simple steps!" It can get frustrating, I get it. That’s why, instead of offering another quick fix, I’m giving you a clear look at why your credit matters and what steps you can take when buying a home.
When you're ready to buy a home, one of the first things you need to think about is your credit score. It plays a pivotal role in determining your mortgage approval, the interest rates you’re offered, and how much your monthly payments will be. If you’re looking to secure the best deal on your home loan, improving your credit score before you apply can make all the difference.
As a lender here in Canon City, I’ve worked with many clients at different stages of their credit journeys. Whether you're just starting to think about buying a home or you're ready to apply for a mortgage, the good news is that there are plenty of ways to boost your credit score and set yourself up for success. Let’s dive into how your credit score affects the home buying process, what credit score ranges mean for mortgage loans, and simple tips to improve your score before applying for a mortgage.
Why Your Credit Score Matters in the Home Buying Process
Your credit score is essentially a snapshot of your financial responsibility, and lenders use it to predict how likely you are to repay a loan. When you apply for a mortgage, your credit score can impact whether you’re approved and how much you pay each month.
A higher credit score means you're more likely to be offered a loan with better terms, lower interest rates, and potentially even a larger loan amount. On the flip side, a lower credit score could result in higher interest rates, larger monthly payments, or even loan rejection.
For example, when I work with clients who have strong credit scores, I’m able to offer them better mortgage rates, meaning they pay less over the life of their loan. But if your credit score is lower, it may be more difficult to get approved for the best mortgage products, and your monthly payments will be higher because lenders take on more risk.
Credit Score Ranges and What They Mean for Mortgage Loans
Credit scores range from 300 to 850, and lenders typically categorize scores into four ranges. Understanding these ranges can help you gauge where you stand and what kind of loan options you might qualify for.
Excellent (750+)
When your score is 750 or higher, you're in the "excellent" range. This means you’ll have access to the best loan rates, terms, and conditions. Lenders are confident in your ability to repay the loan, and you’ll be offered the lowest possible interest rates, which can save you thousands of dollars over the life of your mortgage.
Good (700-749)
If your score is between 700 and 749, you're still in a great position. You’ll be offered competitive rates and favorable loan terms, but you may not have access to the absolute best rates available. That said, you're still in a strong position for getting a loan that works for you.
Fair (620-699)
A score in this range means you may qualify for a mortgage, but it could come with higher interest rates. Lenders see you as a slightly higher risk, so they may charge you more for the privilege of lending to you. If your score is in this range, you may want to work on improving it before applying for a mortgage.
Poor (below 620)
With a score below 620, your options may be more limited. You may still qualify for a loan, but it will likely come with a higher interest rate and stricter terms. You may also need to put down a larger down payment to offset the risk of lending to you. In this case, I always recommend working to improve your score before applying for a mortgage if possible, as it can have a significant impact on your monthly payments and the overall cost of the loan.
Credit Pro Tips Before Applying for a Mortgage
While your credit score is a reflection of your financial habits, there are concrete steps you can take to improve it. Here are five practical tips that can help you boost your credit score before you apply for a mortgage:
1. Pay Your Bills on Time
One of the most important factors in your credit score is your payment history. Payment history accounts for about 35% of your FICO score, so it’s crucial to make all of your payments on time, every time. Late payments, especially those over 30 days, can significantly damage your score.
Set up automatic payments for recurring bills, like credit cards, utilities, and loans. This way, you can avoid missing payments and watch your score improve over time.
2. Reduce Credit Card Balances Below 30% of the Limit
Your credit utilization ratio is another key factor in your credit score, and it’s something you can control. This ratio compares the amount of credit you're using to your total available credit. If you’re using a high percentage of your available credit, it can negatively impact your score.
For example, if you have a credit limit of $10,000, try to keep your balance below $3,000 (30%). The lower your credit utilization, the better your score will be.
3. Avoid Opening New Credit Accounts Before Applying for a Mortgage
When you apply for a new credit card or loan, it can cause a temporary dip in your credit score. This is because credit inquiries can reduce your score slightly. Plus, new credit accounts lower the average age of your credit history, which can hurt your score.
Wait until after you’ve closed on your home before opening new credit accounts. It’s best to avoid any big changes to your credit while you’re preparing for a mortgage application.
4. Check Your Credit Report for Errors
It’s common for people to have errors on their credit reports, like incorrect account information or payments marked late that were actually paid on time. These errors can drag down your score unnecessarily.
I recommend that all my clients check their credit reports at least once a year. If you spot any mistakes, file a dispute with the credit bureaus to get them corrected. You can do this for free at AnnualCreditReport.com.
5. Keep Old Accounts Open
The length of your credit history makes up about 15% of your FICO score. Closing old credit accounts can shorten your credit history, which can negatively affect your score. Even if you’re not using an old credit card, it’s often better to keep the account open.
if you’ve had a credit card for 10 years but rarely use it, keeping it open can help increase the length of your credit history, which can boost your score.
Want better rates? Of course!
If your goal is to secure the best mortgage rates, improving your credit score is a key part of the process. A higher credit score typically means you’ll qualify for better interest rates, which translates to lower monthly payments and less paid in interest over the life of your loan.
Here are a few strategies to help you qualify for better rates:
Aim for a Higher Credit Score Before Applying:
If your score is currently in the fair or poor range, taking the time to boost it before applying for a mortgage can pay off in the long run. Even small improvements can lead to significant savings.
Save for a Larger Down Payment:
Even if your credit score isn’t perfect, a larger down payment can help you qualify for better rates. A larger down payment reduces the lender’s risk, making it more likely that you’ll get approved for a loan with favorable terms.
Work with a Mortgage Lender:
Sometimes, finding the best loan isn’t just about your credit score—it’s about finding the right loan program for your financial situation. A mortgage lender can help you explore all your options, whether that’s conventional loans, FHA loans, or other specialty programs. They can also shop around with different lenders to secure the best rates available.
Secure the Best Loan for Your Dream Home
Boosting your credit score before you apply for a mortgage is one of the smartest moves you can make as a homebuyer. By understanding how your credit score affects your loan options and following these practical tips to improve it, you’ll be in a much better position to secure a mortgage with the best possible rates and terms.
As your local mortgage lender, I’m here to guide you through every step of the process, from improving your credit score to finding the best loan for your needs. If you're ready to start your journey to homeownership, feel free to reach out. Let’s work together to make your homeownership dreams a reality!
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Debbie Betts, NMLS #259629, is a mortgage lender under The Mortgage Co. NMLS #68929. Her license #100030463. This is information purposes only and is not a commitment to lend. Equal housing opportunity.