Your credit score dictates whether you will be approved for a home loan or not, and what mortgage terms you are qualified for. If you really have a plan to buy a house, it is important that you know your credit score early on. Your FICO score is indirectly proportional to the interest rate that will be offered to you. If you have a higher credit score, you might get a smaller interest rate; if your credit score is low, you might receive a high-interest rate.
You can determine your credit score by typing the required data into the software that analyses it and gives it values. Keep in mind that different lending institutions are not necessarily using the same scoring system, so don’t be surprised if you will be given different credit scores from different banks.
Your credit score will be determined by the following factors:
30% – Amounts You Owe
15% – Length of Your Credit History
10% – Types of Credit Used
10% – New Credit
What is the ideal credit score? In general, a good credit score is from 340 to 850. If your credit score is within this range, it could mean that you will be getting a better deal from the lender. The lender believes that when you have a good credit rating, you pose a lesser risk of not paying what you owe them.
If you will score more than 700 points, typically you will be given more financing range and lower interest rates. However, this doesn’t mean that you will be automatically not receiving any loan if your credit score is very low. Here is a look at the credit score to interest rate ratio:
Up to 499: 1%
500 – 549: 5%
550 – 599: 7%
600 – 649: 11%
650 – 699: 16%
700 – 749: 20%
750 – 799: 29%
Over 800: 11%
When you apply for a home loan, most lenders use credit reports and scores from all three major credit reporting agencies which include Transunios, Equifax, and Experian. Once they receive your credit ratings from three different agencies, they will take the average scores from the three to use for your loan application.
Before you apply for a mortgage, make sure that you all the things related to your finances are ironed out. Getting a good credit rating might mean that you can save thousands of dollars by having a low-interest rate.