If you follow our blog, you probably already know that your credit score has the power to make or break your chances of getting a mortgage. If your score is low, you’ll either end up with a higher interest rate or get rejected altogether!
When you’re ready to pursue your real estate goals, it’s not enough to know your credit score. You need to understand where it comes from so that you can remedy any shortcomings before they become barriers at the mortgage desk.
Think of your credit score as a recipe with five main ingredients. Here are the “ingredients” that combine to create your score:
- Payment history: Your payment history accounts for 35% of your credit score. You can improve this part of your score by paying your bills on time. Late payments on your current mortgage (if you have one), rent, or credit card bills will nosedive this number quickly.
- Credit utilization: Credit utilization refers to the amount of credit you’re using versus the amount you have available. A good rule of thumb is to keep your credit utilization under 30%. For instance, if you have $10,000 of credit available, try to use only $3,000 of it at one time. Credit utilization makes up 30% of your score.
- Length of credit history: The longer you’ve been using credit successfully, the better. However, if you have a short credit history, don’t despair! Even people who have only been using credit for a couple of years can still qualify for favorable home loans if they don’t have any other red flags on their credit report. This factor makes up approximately 15% of your credit score.
- Amount of new credit: Every time you take on more debt, it temporarily lowers your credit score. That’s why we recommend that loan applicants avoid making major purchases or opening new lines of credit until long after the approval process is complete. This accounts for 10% of your credit score.
- Credit diversity: The types of debt you hold contribute to 10% of your credit score. Generally, a mix of different types of debt, such as credit cards, retail accounts, and car loans, are your best bet.
Contact MortgageDepot Today!
Are you suffering from credit score confusion? Contact MortgageDepot today to learn more details about how your credit score will affect your mortgage experience.
Connect with one of our loan consultants to learn more.
