How important is your credit score when applying for a mortgage? The answer: very important. Mortgage lenders will use your credit score as one of the most important factor a when considering your mortgage application. So, you should keep your credit score as healthy as possible here's a mortgage calculator to help you.
There are five different categories that influence your credit score. Please use the information below to improve your score.
1. Payment History: Your payment history indicates whether you have been keeping up with your debt payments on time. This category keeps track of any past-due and delinquent payments. Missing a payment is viewed negatively, regardless of the amount. Lenders assess the ‘likelihood’ of you missing a payment and evaluate your risk to them.
2. Owed Amounts: This factor compares what you owe against your borrowing limit. The utilization of your credit is calculated as your balance divided by your available credit. One common myth is that bigger borrowing amounts negatively impact your score, make sure to understand how much you owe and manage the costs accordingly.
3. Length of Credit: Also important to your credit score is how long you have been using credit products. This measures how long the various accounts have been opened and their activity. It is actually better to keep older credit card accounts open because their age is a benefit; however, if you no longer use them, it is better to close them to help prevent fraud.
4. New Credit: This shows the frequency at which you seek new credit and how you handle those accounts once they are opened. Anytime you request new credit, a credit check is performed. The number of times you apply for credit, whether it’s for a car loan or store credit card, will affect your score. Too many credit applications are viewed negatively. However, it is okay for multiple lenders to access your credit score within 30 days for the purpose of comparison shopping for the same product such as a mortgage loan. Typically, these are treated as a single inquiry and will have little impact on your credit score.
5. Types of Credit: This takes into account the type of loans you have undertaken, such as lines of credit, student debt, credit cards, mortgages and car loans. Having a wide variety of credit accounts shows that you are able to manage recurring monthly obligations; however, too much credit can signal unhealthy borrowing habits and an over-reliance on credit.