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    Shopping for a Mortgage? How Your Credit Score Affects Your Application.

    Most Americans strive to own their own homes. If you are like most prospective homeowners, going shopping for your dream home can’t happen without also shopping for a mortgage. 

    With escalating home prices and a forever-changing economic climate, it can be challenging to secure a mortgage with the terms and rates that are most attractive. You will have to pass a number of criteria before lenders will even look at giving you a loan. Some of those include how much you’ll be putting down if you have a job with a good income and last, but not least, whether or not you have a healthy credit score.

    The higher, the better

    A healthy, solid credit score is something you should be aiming for whether or not you’re looking to be a homeowner. It will help you to secure other forms of credit as well. Back to shopping for a mortgage — the higher your credit score is, the better chance you have of getting a mortgage with stellar terms and interest rate. A credit score of 670 or higher is considered to be good. That means lenders look at you as being low risk for defaulting on your loan and perceive you as a good candidate. However, if you have a credit score of 740 or better, lenders look at you as being an excellent candidate for a loan. 

    Getting a mortgage in 2020 and beyond

    Different lenders have different earmarks, but generally speaking, a credit score between 620-680 is considered the bare minimum to qualify for a mortgage in 2021. As mentioned earlier, lenders will look at other things besides your credit score when considering your mortgage approval. They can include:

    • Your annual income;
    • Your overall expenses;
    • Your debt load;
    • How much you are looking to borrow;
    • Your gross debt service ratio or your total monthly housing costs;
    • The amortization period of the mortgage.

    How to boost your credit score

    If your credit score is on the lower side for securing a mortgage, there are some things you can do to make it more appealing to potential lenders. It might even be wise to work on improving your score before you embark on shopping for a mortgage. Here are some ways on how to get your score looking healthier:

    • Always pay your bills on time and in full;
    • Try to minimize the overall debt you’re carrying;
    • Pay off highest interest rate credit cards first;
    • Stay below your debt utilization ratio — do not use more than 30% of your available credit;
    • If you’re starting to build or rebuild your credit, you might want to choose a secured credit card;
    • Limit the amount of credit for which you apply in a short period;
    • Do not cancel credit cards. Doing so reduces the average age of your accounts, and credit bureaus like to see accounts that are long-established;
    • Periodically review your credit report and look for mistakes or signs of identity theft.

    Lenders want to know you make enough money every month to cover your bills and expenses. 

    So, what if my credit score is on the low side?

    Generally speaking, minimum credit scores pertaining to mortgages refer to the larger banking institutions. Conventional lenders have stricter parameters to fulfill when agreeing to lend you money for whatever reasons, including to buy a house. If you have a less than pristine credit score, you do have options. Subprime lenders, credit unions and trust companies are sources you could investigate if you don’t qualify at a conventional bank.  If you are approved, it’s likely you will be paying a higher interest rate than is offered by a conventional lender. This is why you might want to consider working on your credit score prior to shopping for a mortgage. 

    When you apply for a mortgage loan, the lender will have to do a hard inquiry on your credit report which could result in your score dropping a few points. So, unless you’re absolutely certain that you want to buy a house, you might want to put off shopping for a mortgage. With a handsome credit score, it will be much easier for you to be approved for a lower rate which will result in your mortgage being less expensive and more money in your pocket.

    Written by: Amelia Brown

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