A house is a valuable asset because you have a place of your own without worrying about rent. However, the homebuying process is not easy, and most people do not have the means to pay for a house out of their own pockets. For this reason, a mortgage is taken out, which allows the homeowner to borrow money from the bank to purchase the property.
The house secures this loan, so the bank can take possession of the home if the homeowner fails to make payments. However, before a mortgage can be secured, the lender will evaluate the borrower’s credit, income, and other financial information to ensure they can afford the loan.
The primary factor that lenders will look at is the borrower’s credit score, which measures the borrower’s history of repaying debts. Few people know how credit scores work, so we will discuss the details in this article.
What Is a Credit Score?
Also known as a FICO score, the credit score is a number from 300 to 850 that measures an individual’s creditworthiness and the likelihood of them paying back their loan. The score is based on the borrower’s credit history. It will be calculated from the information found in their credit report, which contains information about the borrower’s open and closed accounts, such as credit cards, mortgages, and other loans. Additionally, the report includes information about the borrower’s payment history, such as if they have missed or exceeded their credit limit. The report also includes other factors, such as the borrower’s age and the length of their credit history.
The higher the credit score, the better the creditworthiness. Borrowers with a score of 650 or higher are considered excellent risks and will generally qualify for the best interest rates. On the other hand, borrowers with a score below 650 can still secure a loan, but they may be subject to higher interest rates.
Improving Your Credit Score
Lenders will see multiple credit applications as a red flag because it could indicate that the borrower is in financial trouble. Therefore, borrowers must improve their credit scores before applying for a loan. Some of the best methods include:
Pay All Your Bills on Time
One of the best ways to improve your credit score is to pay your bills on time. This includes everything from your rent or mortgage to your credit cards and any other loans you may have. Paying bills on time demonstrates that you are a responsible borrower and can be trusted to repay your debts.
When you miss a payment, your credit score can drop significantly. This is especially true for credit cards and other loans, as these companies usually report any missed payments to the credit bureaus. To avoid this, you must know the due dates for all your bills and pay them on time.
Lower Your Credit Utilization
Credit utilization refers to the amount of available credit you have used. It is calculated by taking your total credit card debt and dividing it by your total credit limit. The lower your credit utilization, the better it is for your credit score.
You should immediately pay off any existing balances to lower your credit utilization. This will reduce the total debt you owe and help you stay within your credit limit. By extension, you should limit your purchases and only use your credit card when necessary.
You can also consider requesting a higher credit limit from your credit card issuer. This will lower your credit utilization ratio, increasing the total amount of available credit you have. However, you should be careful not to overspend, as this could further damage your credit score.
Avoid Opening New Credit Cards
Opening a new credit card can be tempting, but you must avoid this to maintain a good credit score. Opening multiple credit cards can hurt your score, as it can increase your credit utilization ratio. This is the amount of credit you use relative to the available credit.
However, you should also avoid closing any existing credit cards. While this may seem like a good idea, it can harm your score. Closing a credit card will reduce your available credit, which can increase your credit utilization ratio and hurt your score. In short, you must simply avoid opening or closing new credit cards before applying.
Avoid Applying for New Loans
Because you are already applying for a mortgage, you must avoid applying for other new loans, such as a car or personal loans. Taking out multiple loans at once can hurt your credit score, showing lenders that you are overextending yourself financially. This can be seen as a risk, making lenders less likely to approve your mortgage loan.
Avoid Co-signing on New Loans
When applying for a mortgage, you must avoid co-signing on new loans. Co-signing on a loan is a serious financial commitment. It can affect your ability to get approved for a mortgage because you are responsible for repaying the loan if the primary borrower cannot, which is a risk in the eyes of lenders.
Conclusion
The credit score is vital in determining a borrower’s eligibility for a loan, so it must be maintained at a higher number. Taking care of your finances will be challenging, but it will be worth it because it can help you get your dream home. When you do, you can look forward to living in a place you can call your own and starting a new chapter in your life.
If you are looking for mortgage brokers in Michigan, Amax Lending can help you! We understand how complex the homebuying process can be, so we are here to guide you every step of the way to get you closer to your dream home. Call us today at 248-209-5088 and allow us to help you!
