by Maurie Backman | Feb. 16, 2021
Thinking of applying for a home loan? Make sure your credit is solid.
You'll need to meet certain criteria to qualify for a mortgage. As a general rule, you'll need a good credit score, a reasonable debt-to-income ratio, and a stable source of income. But actually, in today's borrowing environment, a good credit score may not cut it. Rather, you may need to aim for a great score.
The average credit score among mortgage borrowers in 2020's third quarter was 786, according to the New York Federal Reserve. For context, the average U.S. credit score is 706. While you'll generally need a minimum credit score of 620 to qualify for a conventional mortgage, lenders can set their own standards. And based on this data, it's clear that mortgage lenders are raising the bar for borrowers who want home loans during these difficult economic times.
First, let's be clear. Just because the average borrower's credit score was 786 in last year's third quarter doesn't mean you won't qualify for a mortgage with a lower score. But the higher your score, the more likely you'll be to snag today's best mortgage interest rates. As such, it pays to work on boosting your score if it's not where you'd like it to be.
How do you do that?
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Start by paying all incoming bills on time. Of the various factors that go into calculating your credit score, your payment history carries the most weight. Being timely with your payments can help this aspect of your score improve. So set up autopay for your bills and shed non-essential expenses to make it easier to keep up with your living costs.
Next, look at paying off some existing credit card debt if you can. The second most important factor that goes into determining your score is your credit utilization ratio, which speaks to the amount of revolving credit you're using at once. Ideally, that ratio should not exceed 30%. If you have a total credit limit of $10,000 and owe $3,500 on your various credit cards, you could improve your score by paying down even $500.
Furthermore, it's a good idea to check your credit report for errors. There might be, for example, a delinquent debt you never racked up. It might belong to someone with the same name but a different Social Security number. These mistakes can happen, but working with the credit bureaus to correct them could help your score rise.
Finally, if you're serious about buying a home, don't apply for any other credit in the near term. Each credit card application you fill out, for example, will result in a hard inquiry on your credit record. A single hard inquiry won't hurt your credit score too badly, but multiple hard inquiries will. If your score is right on the cusp of being excellent, it would be a shame for something like a seven- or eight-point hit (which is what might happen with a single hard inquiry) to drop it down.
You don't necessarily need a credit score of 786 to get a mortgage, but you may need to prepare for the fact that lenders are getting stricter. If your score needs work, boosting it could mean you're more likely to get approved for a home loan. On top of that, you could snag a competitive rate and keep your monthly payments affordable for many years to come.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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