If you are in the market to purchase a home, then you’ve definitely heard the term “credit score.” What exactly is a credit score? In short, your credit score is a numerical representation of the likelihood that you will pay your bills. This number is used by nearly every company that extends credit to you, including credit card and mortgage companies.
The most widely used credit score used to qualify an individual for a home loan is your “mortgage credit score”. Your Mortgage Credit Score is a different number than your regular FICO score because it assesses risk slightly differently. The Mortgage Credit Score can be close to your regular score or it can vary quite a bit.
For those who bought homes in 2017, the average score was 754. If you are looking to better your credit score for the purpose of buying a home yourself, this is what you should know.
What Is a MORTGAGE Credit Score?
The most widely used credit score comes from the Fair Isaac Corporation’s FICO 8 Score model. The FICO scoring model uses a variety of factors to “rank” your score on a scale that ranges from 300-850. The higher your score, the more likely you are to pay on time and the better interest rate you will receive. Lending agencies rely on unique scoring formulas weighted for mortgage-related factors. When mortgage lenders “pull” your credit, they actually get three separate scores that take into account your personal history with home loans. These numbers can be higher or lower than the generic FICO score you see on some reports.
Lenders generally consider the three scores as a range and then use the middle one as their best guess of your credit reliability.
Pay Your Bills on Time, Every Time
The biggest factor of your mortgage credit score is paying all of your bills on time. This is called your “payment history” and makes up 35% of your score. If you have a previous mortgage that shows an on-time payment history then your score will be higher than those who have never had a mortgage or who have late payments on their report.
Do Not Max out Your Credit Cards
The second largest factor in your credit score is your “credit utilization”, which is how much credit you have used compared to your credit limits. The rule of thumb is to never carry a balance over 30% of your credit limit on any credit card. The lower the credit utilization is, the better your score will be. This makes sense because if your credit cards are always “maxed out” you are probably doing something wrong.
Do Not Apply for Too Much Credit
About 10% of your credit score is derived from how many credit inquiries are on your report. Each time you apply for credit an inquiry is placed on your credit report. Keep your inquiries at a bare minimum in the year leading up to applying for a mortgage. Banks do not like to see a lot of inquiries, as they might think you are overextending yourself.
By following these steps you can maximize your mortgage credit score and lower your interest rate, which will definitely be beneficial when it comes to applying for a home loan. Getting even a slightly lower interest rate can help you to save thousands or tens of thousands of dollars over the life of your mortgage.
You might also like:
- How to Check Your Credit Score Before Applying for a Mortgage
- Mortgage Options: The VA Home Loan
- Rising Responsibility: 3 Signs You’re Ready to Take on a Mortgage
- How Pro Homeowners Pay off Their Mortgage Faster Than Their Neighbors
- Financial Figures: How to Budget for a Mortgage
- Home Buying 101: 4 Signs to Look for When Choosing a Mortgage Lender
