What is a Credit Score?
A credit score is a method for lenders to establish how well a borrower is able to meet their debt obligations. Credit tells a story of the borrower’s ability to pay debts on time and also predicts a borrower’s ability to handle debt in the future. Credit is extremely important, and establishing a good credit score and good credit habits early on will make it easier to get approved for a loan in the future.
How is a Credit Score Determined?
Credit can be understood through the 5 C’s of Credit: Character, Capacity, Capital, Collateral and Conditions.
- Character: The borrower’s credit reputation based on a credit score and employment verification that proves how faithful a borrower has been in paying off past debts.
- Capacity: A borrower’s ability to pay back a loan. This is determined based on an income-to-debt ratio that shows how much cash a borrower has available to pay back their loan each month.
- Capital: Refers to how much of a down payment is made. Typically, the higher the down payment, the less likely the borrower will default on their loan.
- Collateral: Additional asset(s) the borrower has in his or her name that is used as security for the loan.
- Conditions: The terms of the loan and interest rate.
Why Does Having a Good Credit Score Matter to Mortgage Lenders?
A credit score is one factor that helps a mortgage lender determine your loan amount, interest rate and the mortgage terms. Mortgage lenders also consider your income, debt, employment history, and subject property when providing mortgage financing.
There is no specific credit score that is needed to get a mortgage, but having a good credit score and a strong credit history can help ensure a smoother process. Since your credit score reflects your ability to manage and pay off debt, mortgage lenders typically like their borrower’s to have a good credit score when applying for a mortgage. If your credit score is not where you would like it to be prior to your mortgage application, we can help you improve your credit score!
How Can I Improve my Credit Score?
There are several different actions individuals should take to improve their credit and maintain a good credit score.
- Pay bills on time: Before spending any money, make sure you pay all of your bills on time and in full, if possible. Create a schedule for when each bill is due so that you do not forget something.
- Spend less than 50% of your credit limit each month: Try not to max out your credit card each month. Show that you are responsible with your money by spending around 30-40% of your limit.
- Establish credit as early as possible: Open a credit card or auto loan to begin developing a credit history. Pay it off in full each month.
- Space out applications for credit: Don’t apply for a bunch of credit cards, a car, and a home mortgage in the same month. Space out your applications as needed.
- Diversify your lines of credit: Do not open six different credit cards. Instead, maybe have one credit card and an auto loan or an auto loan and student loan.
Need more help to develop and maintain a good credit score? Feel free to contact us today. Our experts have years of experience in home financing and can help you determine when the best time to apply for a loan will be.