A crucial part of determining whether you can be approved for a mortgage is your credit score. If approved, those three little numbers will play a critical role in determining the terms (e.g., interest rate) you will receive. Your score will directly affect how much you will pay over the life of your loan. So how is your credit score determined? Here are the factors that credit agencies use when determining your score.
Your payment history is the single largest factor contributing to your credit score making up 35 percent of the number. Be sure to pay all debt obligations on time. Even one late payment can have a significant negative impact on your score.
An additional 30 percent of your total score is based on your credit utilization. Lenders want to see that you are using your credit wisely, but not to the point of reaching your spending limits. Experts recommend a utilization ratio of less than 10 percent, but up to 20 percent is deemed okay.
We’re not talking about your age as a person, but rather the length of your credit history. The length of your credit history is a combination of time each account has been open and the time since the most recent action on each account. The length of credit history comprises 15 percent of your score.
Opening too many new lines of credit at once could signal to potential lenders that you are experiencing financial difficulty. Only apply for the credit that you need and avoid making any new credit applications during the home buying process. Remember, the greater the length of your credit history the better. Any new lines of credit you open will reduce the length of your history.
Though affecting your credit score to a lesser extent, having a mix of different types of credit (e.g., credit cards, installment loans, etc.) make you a more responsible borrower in the eyes of a potential lender.The combination of your credit mix and new credit that you have comprises 10 percent of your score.
Beaches Title offers a full line of line of real estate and closing services for realtors, buyers, and sellers. Let us help make your home buying, or selling, process the best it can be.