How to Improve Your Credit Score Before Buying a Home

Why is Your Credit Score Important for Mortgages?

Lenders use your credit score as an indicator of your ability to repay borrowed funds. Having a high credit score can actually work in your favor by potentially securing you a lower interest rate. This means you could end up saving thousands of dollars in interest over the duration of your loan—a win-win situation!

When it comes to assessing your creditworthiness, credit scores play a crucial role. They provide a quick snapshot of your credit profile’s overall health, making them a valuable tool for mortgage lenders. While it’s important to remember that your credit profile consists of more than just your credit score, many loan programs take both factors into account when evaluating your loan application. So, it’s wise to keep an eye on both aspects as you navigate the loan process.


Which Credit Score is Used For a Home Purchase?

Your credit score can actually vary across different industries because each one evaluates different factors to assess their risk. So, it’s important to note that your credit score for a mortgage may not be the same as your score for an auto loan, insurance, or credit card companies.

When it comes to mortgages, lenders like Treadstone tend to prefer the FICO score. This score is widely accepted and trusted because it is approved by Fannie Mae and Freddie Mac, two federally backed agencies that establish standards for home loans. It’s considered one of the most accurate scores in the industry.

FICO scores are calculated using various pieces of credit data from your credit report. These data points are grouped into five categories, and each category carries a different weight in determining your overall score. It’s important to remember that your FICO score takes into account both positive and negative information found in your credit report. This comprehensive evaluation provides a more holistic view of your creditworthiness.


Understanding the Components of Your Credit Score

Your credit score consists of five key components, and each component is calculated based on various aspects of your credit profile. When these components are evaluated and scored, they are combined to form your overall credit score.

The most significant factor in determining your credit score is your payment history, which carries a weight of approximately 35% in the credit score calculation. This component reflects your track record of making timely payments on loans and lines of credit. Paying your bills on time consistently has the greatest positive impact on your score!

Around 30% of your credit score is influenced by the amount you owe in relation to your total available credit. Maintaining low balances and having a higher proportion of available credit can have a positive effect on your score.

The age of your credit lines accounts for about 15% of your credit score. Having a longer credit history, regardless of your payment history, tends to result in a higher credit score compared to individuals who have recently opened their first credit card or loan.

Around 10% of your score is based on new lines of credit. This includes the number of inquiries you have accumulated in the past 24 months. The fewer inquiries you have, the better it is for your credit score.

The final 10% of your credit score is determined by the mix of fixed debts (such as loans with fixed monthly payments) and revolving debts (such as open lines of credit with varying payments and schedules). Having a mix of these different types of debts can be beneficial for your score.

By understanding the weight and importance of each credit score component, you can make informed decisions to maintain and improve your creditworthiness.