When it comes to getting a mortgage, one of the biggest things lenders look at is your credit. Credit is super important for deciding if you’ll get approved and what loan terms you’ll get. In this chapter, we’ll break down the first C of mortgage lending: Credit. We’ll talk about how credit scores are calculated, what affects them, and why having a good score is key.
First off, credit scores. These scores show how trustworthy you are with money. They range from 300 to 850, with higher being better. Your score is based on things like payment history, amounts owed, length of credit history, new credit inquiries, and types of credit. The FICO score is the most common type.
- Payment history is huge. Lenders want to see you’ve paid your bills on time. Late payments can really hurt your score and make it hard to get a loan.
- Amounts owed is also important. Lenders look at how much debt you have compared to your credit limits. If you owe a lot, it might seem like you’re taking on too much debt.
- Length of credit history matters too. The longer you’ve had credit, the better. It gives lenders more info about how you handle your money.
- New credit inquiries can hurt your score if you apply for too much credit at once. Each application is a “hard inquiry” on your report. Too many in a short time can make you look desperate.
- Types of credit you use also play a role. A mix of different types of credit, like credit cards, car loans, and mortgages, shows you can handle different kinds of debt.
So, why is a good credit score important? Lenders use your score to decide how risky it is to lend to you. A higher score means you’re seen as more responsible with money and more likely to pay back your debts.
A good score doesn’t just help you get approved for a mortgage—it can also get you better loan terms. With a high score, you might get lower interest rates and better terms, saving you a lot of money over time.
If your credit isn’t great or you’re just starting out, there are ways to improve it. Always pay your bills on time since payment history is a big part of your score. Try to pay down your debts and keep your balances low compared to your credit limits. Building a solid credit history by using different types of credit responsibly will also help.
Understanding credit is key to getting a mortgage. Your credit score shows lenders how you handle money and repay debts. A good score can make a big difference in getting approved and getting good loan terms. By keeping your credit healthy, you’ll be in a better position to get the mortgage you want.
