Checking Your Credit Score
You should check your credit score well before you begin the mortgage process so you will know where you stand and the mortgage rate you could qualify for. You can check your credit score for free through several online services. Many banks, credit unions, and credit card providers offer credit scores as a regular feature. Since most major mortgage lenders use your credit score in their decision, it’s worthwhile to obtain all three of your reports to make sure the information on your record is accurate.
It’s a good idea to research your credit score and your credit reports well in advance of making a major purchase so you have time to address any errors or other issues you might discover.
Use Your Understanding Of Credit To Build Your Credit Score
The first step in your credit journey is understanding what a credit score is and how it is calculated. Once you know the basics about credit score, you can begin to improve your credit score. Doing so doesn’t simply improve your standing in the eyes of lenders, but it can also save you thousands of dollars in interest payments over the course of your lifetime.
Improve Your Credit Score With Borrowell And Credit Karma
Instead of going directly through the credit bureau, you can open an account with Borrowell or Credit Karma. Both companies will email your credit score and credit report to you for free every week. It’s free to sign up, and you can access your credit report within minutes of becoming a member. In my opinion, this is the easiest and cheapest way to stay on top of your credit. Borrowell will send you a copy of your Equifax Canada credit report while Credit Karma has partnered with TransUnion.
These companies make money through affiliate partnerships with various loan and credit card companies. You will receive credit offers based on your credit score. You are under no obligation to apply, and I would exercise extreme caution before doing so. Instead, take advantage of the free credit reporting, as well as the educational resources both companies offer to help you improve your credit score.
What Credit Score Is Needed To Buy A House
You dont need flawless credit to get a mortgage. In some cases, scores can even be in the 500s. But because credit scores estimate the risk that you wont repay the loan, potential lenders will reward a higher score with more choices and lower interest rates.
For most loan types, the credit score needed to buy a house is at least 620. But higher is better, and borrowers with scores of 740 or more will get the lowest interest rates.
What Is A Good Credit Score For An Auto Loan
Next to a mortgage, vehicles are often among the most expensive purchases the average adult makes in the United States. According to the Kelley Blue Book, an independent automotive valuation agency, the average price for a light vehicle purchase in the U.S. was $38,940 in May of 2020.
For a significant purchase like a car, having good credit could mean saving thousands when youre financing your purchase.
For example, someone with a FICO score of 620 who is looking to buy a new car is told by the car dealer they could qualify for a 60-month loan for $38,000.
According to the FICO Loan Savings Calculator, your loan in June 2020 would have an APR of 16.714% and your monthly payments would be $939. Over the life of the loan, youd pay an additional $18,315 in interest.
A $942 per month car loan payment is a significant amount, even if you can get approved. So, lets assume you hit the pause button and decide to work on improving your credit before taking out a loan. When you apply again down the line, you learn that youve boosted your score to a 670, which is considered a good credit score by most credit scoring models.
With a 670 credit score, the FICO Loan Calculator now estimates that you might qualify for an APR around 7.89%. Based on that rate, your monthly payment on the same $38,000 auto loan would be $768. You would pay $8,106 in total interest over the life of your loan.
Because you improved your credit score from poor to good, you would save:
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How Can I Improve My Credit Score
Luckily if your credit scores are currently low, there are there are some things you can do to bring them up, and quickly.
- One of the best things you can do to raise your score is to simply start paying your bills on time. Even payments that are a few days late can have a really negative effect on your score and this effect compounds over time. Older credit problems fade with time and as long as you keep your recent payment patterns in check, the score will keep rising.
- If youre really in a financial bind trying to afford paying your bills on time, if at all, then you should seriously consider booking an appointment to sit down with your creditors or an even better option is you go and see a debt counselor/credit restoration specialist. They can be a financial lifesaver, being trained to deal with people in your exact situation. Sure, this may not improve your credit score dramatically in the beginning, but if you do what they tell you to, and you keep it consistent, your credit score will definitely bounce back within a reasonable amount of time. Many people mistakenly believe that by seeking debt counseling and/or credit restoration they would hurt their FICO Scores. But there is no factual data to back this claim up
How To Earn A Fair Credit Score:
If you are trying to get your credit score into the “fair” range, pull your credit report and examine your history. If you see missed payments or defaulted loans or lines of credit, do your best to negotiate with the lender directly. You may be able to work out an agreement that allows you to make manageable, on-time payments. Getting back on track with these consistent payments could help improve your credit score over time. As you work through meeting your debt obligations, take care not to close any of your accounts. Open accounts with a long history could be positively contributing to your score and can continue to be used responsibly in the future.
Look at your credit report, create a budget that sets aside money to pay off your debts, and learn more about how credit scores are generated: these are the three fundamental steps in moving your credit score upwards.
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Why Your Credit Score Matters To Lenders
Along with a low debt-to-income ratio and a strong financial history, youll need a high credit score for the lowest mortgage rates. Why?
Youd probably hesitate to lend money to a friend who usually takes forever to pay you back or doesnt pay you back at all. Lenders feel the same way about mortgages. They want to lend to people who have a record of on-time payments to creditors.
Lenders rely on credit scores as an indication that a borrower will meet obligations. A higher credit score, experts say, reassures lenders that they will be paid back.
Your credit score is calculated most often with the FICO scoring model and is derived from the information on your credit reports, which are compiled by credit reporting companies. Your reports include a history of your payment habits with borrowed money.
Your credit score is one of the most important parts to qualify, but it is a part, says Michelle Chmelar, vice president of mortgage lending with Guaranteed Rate in New York. You have to have the whole package: income, sufficient assets and credit.
What Else Do Lenders Look At When You Apply
As we mentioned, your credit score is not the only factor lenders examine before they approve or decline your application. They also want to see a favourable history of debt management on your part. This means that on top of your credit score, lenders are also going to pull a copy of your to examine your payment record. So, even if your credit score is above the 600 mark, if your lender sees that you have a history of debt and payment problems, it may raise some alarms and cause them to reconsider your level of creditworthiness.
Other aspects that your lender might look at include, but arent limited to:
- Your income
- The amount youre planning to borrow
- Your current debts
- The amortization period
This is where the new stress-test will come into play for all potential borrowers. In order to qualify, youll need to prove to your lender that youll be able to afford your mortgage payments in the years to come.
Theyll also calculate your monthly housing costs, also known as your gross debt service ratio, which includes your:
- Potential mortgage payments
- Potential cost of heating and other utilities
- 50% of condominium fees
This will be followed by an examination of your overall debt load, also known as your total debt service ratio, which includes your:
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Average Mortgage Rates For A 700 Credit Score
Credit scores are an important piece of the qualification process because lenders use them to predict whether youll repay a loan as agreed. With a good credit score, youre likely to qualify for a home loan and receive a good interest rate.
The table below shows rate estimates from our partner lenders. You can fill in your financial information and select a credit score range of Good to see what kind of mortgage rates are available to you in your area.
The rates in this table display an annual percentage rate , which includes the loans interest rate plus any fees and extra costs charged by the lender.
Because the APR reflects the total cost of borrowing, its a good idea to compare this number when shopping for mortgages. Qualifying for a lower APR can help you save thousands of dollars over the life of the loan.
Someone with a credit score of 680, on the other hand, might get an APR of 3.17%. Their monthly payment would be $862.
While thats only a difference of $20 a month, it adds up over time. The person with the lower credit score would pay $7,200 more over the life of the loan.
While you should focus on getting your credit score as high as possible, it doesnt need to be perfect. Improving your credit score by just a few points might put you in the next credit score range and give you access to better rates.
Enter your loan information to calculate how much you could pay
Where To Go From Here
Its important to pay down your balances and keep your credit utilization under 30%. Its also wise to have a mix of installment and revolving accounts.
Of course, you also want to make sure you are making your payments on time from here on out. Even one late payment can be very damaging to your credit.
Length of credit history also plays an important role in your credit score. You want to show potential creditors that you have a long, positive payment history.
Building excellent credit doesnt happen overnight, but you can definitely speed up the process by making the right moves.
Give Lexington Law a call for a free credit consultation at and get started repairing your credit today! The sooner you start, the sooner youll be on your way to having excellent credit.
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What Is A Credit Score And Why Does A Higher Score Mean More Favorable Rates
If you took your entire relationship with debt and boiled it down to a number between 300 and 850, youd have your credit score. Equifax, TransUnion, and Experian are the three major credit bureaus, but they all use similar criteria to create a credit score. Your FICO score, created by Equifax, is most lenders preferred credit score, but all of these scores may be considered when evaluating creditworthiness. When generating your score, credit bureaus weigh payment history, debt volume, the age of your credit, credit diversity , and credit inquiries. So if youre monitoring your credit, paying on time, and using less than 30% of your total credit, you should be well on your way to a high score.
Lenders then use that score as a guide to offer interest rates and terms for each borrower. If you think of a loan as a bet, the credit score is the odds of the lender being paid back in full. Rather than denying a mortgage application, lenders adjust the rates and terms to make sure their bet is safe. If a borrower has a high credit score, they can offer more favorable rates and terms because its a relatively safe investment. If a borrower has a fair to good credit score, lenders may raise the rates they offer by fractions of a percentage as a way to hedge against a possible default.
For example: Take a homebuyer with a 20% down payment applying for a 30-year-fixed loan to purchase a $200,000 home in New Jersey.
What’s A Good Credit Score To Have How To Get It
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A good typically ranges between 680 and 750. Consumers who fall within this spectrum tend to qualify for excellent interest rates, and loans. However, what constitutes a good credit score is far more nuanced. In reality, the range of scores will depend on both the exact credit scoring model being used and its purpose.
Review Your Credit Reports And Scores
Start your credit improvement plan by figuring out where your credit stands now. In other words, get your credit reports from all three major credit bureaus. It may also be a good idea to check your credit scores at the same time. This will also help you determine what debt to pay off first to raise your credit score.
Checking your credit reports and scores can help you in two ways.
- Uncover potential issues that are holding your credit scores back. Make a list of negative items that may need your attention, such as past-due balances, collection accounts, etc. If your credit reports include scores, they may include reason codes that detail the top four or five reasons why your numbers arent higher. You can use this information to build your credit improvement plan.
- Look for credit reporting errors that you need to address. Incorrect information on your credit report could hold your score backespecially if that information is derogatory. However, you have the right to try to fix credit reporting errors by sending a dispute letter to each credit reporting agency involved in the mistake.
What’s A Good Credit Score By Age
Credit scores vary widely by age. Typically, the younger an individual is, the lower their credit score is expected to be. For a college student, having a credit score above 680 can be considered good. However, by the time an individual is in his late 40s, that same score isn’t quite as good when compared to others in their cohort. This is due to the nature of how a credit score is calculated. Things like the average age of credit and diversity of credit accounts matter a great deal. The older one gets, the easier it is to build up those two factors. Generally speaking, the average credit score goes up with age.
A college student, however, may not require a credit score above 780, therefore a good credit score is something that changes with age. A fresh graduate is unlikely seek a mortgage, where a credit score of 640 would mean high interest rates. Therefore, its typically good enough for individuals in that age group to have a score between 640 and 680.
Recent college graduates are ahead of the curve if they have any credit score at all. According to data by the Consumer Financial Protection Bureau, over 30% of those between 20 and 24 years of age have no credit score. These individuals are referred to as “credit invisible”.
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Your Income Is Important
Having a good credit score alone is not enough to qualify for a mortgage. You must be able to demonstrate stable employment and an income that’s high enough to service the mortgage payments.
To determine whether your income is high enough, lenders use something called debt servicing ratios, both Gross Debt Servicing and Total Debt Servicing . These ratios give the lender an indication of whether you can afford to pay the mortgage each month. It’s not a perfect measure because it doesn’t account for your discretionary spending habits, but it factors in most of your financial obligations.
GDS calculates your monthly housing costs against your gross monthly income. Ideally, this ratio will be less than 32%. TDS takes into account all other debt payments along with the mortgage as a percentage of your gross monthly income. The maximum TDS is 42%, but the lower, the better.