The importance of your credit score when applying for a mortgage
When applying for a mortgage for your new home, your credit score will significantly impact the interest rate you are offered and your ability to qualify for a loan. Credit scores are important numbers that influence everything from the interest rate to the type of loan you can get. While most people have heard a lot about what factors will impact your credit score, knowing what factors will not is just as important.
What is a credit score?
A credit score is a number that tells lenders like Mortgage Equity Partners about your creditworthiness. Basically, this indicates how likely you are to pay back the money you borrow. It is calculated using the information in your credit reports. FICO Scores are the standard for credit scores used by almost all lenders. Your FICO Score is calculated from the information in your credit report. The three major credit bureaus compile credit reports:
The credit score range is between 300 and 850. The higher the score, the more likely you will get better rates and terms from a lender. A “good” credit score is between 670 and 739.
5 things that impact your credit score
1. Payment history 35%
Your payment history affects your credit score the most because it shows how you manage your finances. It also shows how long you have had your accounts and all the most recent activity.
2. Amount of debt 30%
The amount you owe in relation to the amount of credit you have available is a significant factor in determining your credit score. According to Experian.com (2024), it is also one of the factors on which you can have an immediate impact.
3. Length of credit history 15%
The longer your credit history, the higher your credit score will be. The thought process is that experience managing credit accounts will make you better at managing debt. The credit bureaus have statistics that support this idea.
4. Credit Mix 10%
Credit mix refers to the types of credit accounts you have, and the number of accounts impacts your score.
5. New Credit 10%
New credit is considered a challenge to existing debt and negatively impacts your credit score, at least temporarily.
Things that do not impact your credit score
Most personal details about you do not impact your credit score. A recent Consumer Federation of America survey found that out of 1022 adult respondents, 40% believed marriage status influenced credit scores, while 43% thought age also played a part (Transunion.com 2024). The good news is neither of those items is true.
Here is a list of some things that do not impact your credit score:
- Race
- Religious preference
- Age
- Nation of origin
- Gender identity
- Marital Status or history
- Employment Status and history
- Education
- Criminal record
In addition, most of your financial details will not impact your credit score. Income, net worth, property, assets, account balances, and debit card use may affect your loan approval but not your credit score. Missed or late payments for rent, child support, alimony, or bank overdrafts may also impact loan approval but not your credit score unless an account is sent to collections and reported.
Soft credit inquiries, or “soft pulls,” will not impact your credit report or score. They are frequently done when you check your credit score, or a lender checks your credit to prequalify you for an unsolicited offer. Soft credit pulls are also used by your current creditors checking your credit for maintenance purposes. Sometimes, a potential employer may use a soft pull for employment screening.
Managing your credit score and building or improving credit can be tricky, but knowing what does and does not impact it can help. Credit scores are an important tool for evaluating home loan applicants, so you must take all necessary steps to ensure your score is at its best. Our loan officers can help you understand the role your credit score plays in the mortgage loan approval process.
Contact one of our Methuen MEP loan officers today!
Mortgage Equity Partners is not a credit repair company. The information in this article is for educational purposes only. For personalized credit advice, consult with a qualified credit counselor.
Sources:
MyFico.Com
Transunion.com
Experian.com
