February 25, 2021
Your credit score affects your mortgage approval and interest rate. Most mortgages have a minimum credit-score approval number, so if your score is too low, getting approved for a mortgage may be challenging. Hundreds of different credit scoring models exist, including FICO® scores, so your score will vary depending on which one your lender checks.
What does a low credit score imply to a lender?
Your lender or creditor wants to ensure you'll be able to make payments on the loan or credit account you're extended. So, if you have a lower credit score, you'll likely be considered at a higher risk for defaulting on payments. For example, lenders tend to see a score-lowering factor such as previously defaulting on a mortgage as a red flag.
Most negative items may not come off your credit report for up to seven years, so late payments, defaults, and accounts closed for nonpayment can all negatively impact your likelihood for more credit approval.
Does a lower credit score lead to paying more for a mortgage?
Rod Griffin, Senior Director of Public Education and Advocacy for Experian, notes, "Your credit history, and therefore credit scores, are a critical part of the mortgage process. Poor scores can result in paying higher interest rates, which can cost you thousands of dollars over the life of a loan or could cause your application to be declined altogether."
To understand how much a credit score may affect what you pay, MarketWatch compared two sample loans, one with a 630 credit score and one with an 800 credit score. The analysis found that the loan based on the lower credit score could pay as much as $29,876.40 more over the 30-year life of the loan. So, making positive changes to your credit before applying for a mortgage can be extremely beneficial from a financial perspective, meaning a good credit score may help you get a better rate.
Griffin also explains, "You should check your credit report several months before applying to make sure everything is in good shape and to allow time to improve your credit history and scores if necessary. During the mortgage process, your credit report might be checked several times. It is best not to apply for other new credit or increase your credit card balances until after the mortgage loan process is completed. That will ensure there are no unexpected changes that could cause your scores to drop and derail the home purchase."
Does a short credit history decrease your credit score?
To reiterate, when applying for a mortgage, your credit scores and credit history are often two critical factors that weigh in on whether you'll get approved and what your home loan interest rate will be.
If you haven't built up much credit history, your credit scores may be lower. To put this in perspective:
● Making on-time payments accounts for 35% of your FICO® scores.
● Credit usage accounts for 30% of your FICO® scores.
● Credit history length accounts for 15% of your FICO® scores.
How to get your credit ready for when you apply for a mortgage
Wondering what you can do if you have a low credit score? Remember, you can take positive steps to help improve your score and show a potential lender you're reliable by:
● Making payments on time
● Paying down your credit card debt
● Reducing your credit card utilization
● Keeping new credit card charges to a minimum
Plus, don’t forget that the impact of negative items on your credit score and credit history lessens over time, so the longer you demonstrate healthy financial behaviors, the better.
How do you get started with the mortgage process?
You may want to look at the various terms and types of mortgages available and research what might work best for you or speak with a loan officer to learn more. You may also want to review a copy of your credit report to make sure everything is accurate.
What should you do if you don't recognize something on your credit report?
If inaccurate or fraudulent information is on your credit report, you may want to dispute the information before you begin the mortgage process to help avoid bringing down your credit score unnecessarily.
You can dispute a charge by reaching out to the creditor or lender listed and also by contacting the appropriate credit bureau online:
Keep in mind, you may need to provide documentation for the dispute, and there will be a process to get it corrected. Appropriately listed negative information can't initially be removed from your credit report but may most likely be taken off in up to seven years.
Whether you have a good or low credit score, there are ways you can work toward boosting your score to help get a better mortgage rate.
To learn more about PenFed mortgages or what option may be right for you:
● Call 866-386-7254
● Visit the Mortgage Center