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Credit Score Knowledge When Obtaining a Mortgage
We all know that credit will be checked when obtaining a mortgage. But, what items help or hurt an individual's credit score? There are important details that when you understand them, you can be more prepared to purchase a home and have a stronger credit profile for an underwriter.
Understanding Credit Scores
Before diving into improvement strategies, it is important to understand what components make up a credit score. Typically, the credit scores will range from 300 to 850. The higher the score, the better the credit worthiness.
Some of the main factors that the credit bureaus consider are payment history, credit utilization, age of credit history, credit account types and new credit.
Payment History (35%): Your track record of on-time payments.
Credit Utilization (30%): The ratio of your credit card balances to your credit limits.
Length of Credit History (15%): How long you've had credit accounts.
Types of Credit (10%): A mix of credit types (e.g., credit cards, mortgages)
New Credit (10%): Recent inquiries and new credit accounts.
To help you be better educated, here are seven helpful tips for stronger credit:
1. Check Your Credit Reports
Start by obtaining a free copy of your credit reports from each of the three major credit bureaus (Experian, TransUnion, and Equifax). Review them carefully for any errors, outdated information, or accounts that don’t belong to you. If you find inaccuracies, dispute them promptly to have them corrected.
2. Pay Your Bills in a Timely Manner
Your payment history is the most significant factor influencing your credit score. Set up reminders or automatic payments to ensure that you never miss a due date. Even one late payment can have a lasting impact on your credit score.
3. Reduce Your Debt
Focus on paying down existing debts. Some individuals find it easier to start with smaller credit cards to get the balances down. Other individuals start with paying down the high-interest cards first. Strive to keep your credit utilization below 30% of your available credit limit for each account. If possible, pay down credit card balances in full each month to avoid interest charges and improve your utilization ratio.
4. Avoid Opening New Accounts
While it might be tempting to open a new credit line possibly for furniture, for miles or to improve your credit mix, doing so can lower your average account age and have a temporary impact on the score. Each hard inquiry can also affect the score. Therefore, try to avoid applying for new credit tradelines prior to to applying for your upcoming mortgage.
5. Keep Old Accounts Open
Some individuals don't realize it and quickly will close out a credit card. The length of your credit history matters. For this reason, try to avoid closing old credit accounts even if you don’t use them regularly. Keeping them open can help improve the average account age, and potentially have a more positive influence on the credit score. This is especially important when you are planning to purchase or refinance a mortgage for a home.
6. Diversify Your Credit
The credit bureaus will consider the different types of tradelines an individual has on their profile. With a mix of different types of credit such as credit cards, vehicle loans, furniture loans or other installment loans can help improve your score. However, only take on new credit if you can manage it responsibly. For instance, if you only have credit cards, consider applying for a small personal loan to diversify.
7. Use Credit Responsibly
If you have one or two credit cards, or possibly several credit cards, use them sparingly and prioritize paying the balances off each month. A responsible usage pattern demonstrates to financial institutions that you can manage your credit wisely. If you don’t have credit cards, consider getting a secured credit card to build your credit history.
Check Your Credit Reports
Pay Your Bills on Time
Reduce Debt
Don't Open New Accounts
Keep Older Accounts
Diversify Your Credit
Be Responsible
Managing your credit properly and monitoring your credit score in preparation for obtaining a home loan is a smart idea, and considered an essential step toward achieving homeownership. The credit score plays an important role in determining your eligibility for a mortgage and the interest rates you may receive. Whether you’re a first-time homebuyer or looking to refinance, investing time in improving your credit can lead to significant long-term savings and opportunities. Start today, and you'll be one step closer to your dream home.
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Notice To Texas Loan Applicants: Consumers wishing to file a complaint against a mortgage banker, or a licensed mortgage banker residential mortgage loan originator, should complete and send a complaint form to the Texas Department of Savings and Mortgage Lending, 2601 North Lamar, Suite 201, Austin, TX 78705. Complaint forms and instructions may be obtained from the department’s website at www.sml.texas.gov
A toll-free consumer hotline is available at 1-877-276-5550. The department maintains a recovery fund to make payments of certain actual out of pocket damages sustained by borrowers caused by acts of licensed mortgage banker residential mortgage loan originators. A written application for reimbursement from the recovery fund must be filed with and investigated by the department prior to the payment of a claim. For more information about the recovery fund, please consult the department’s website at
www.sml.texas.gov