Whether you are a first time residence buyer or you seek a second home, an investment property or want to buy shares in a coop, your credit score plays a big role in mortgage approval. The lender uses this score to determine your creditworthiness – which affects various aspects of your loan. For instance, the credit score determines the interest rate.
What Credit Score Does a Lender Use?
There are various scores on the market, but the industry standard is the Fair Isaac Corporation (FICO) score. This is a score designed by this business analytic software company to measure your credit risk as a consumer. The score is normally depicted as a figure with a “+” sign after it. For example, the mortgage might require that you have a 620+ FICO score. This means that you need a credit score of 620 or more according to the FICO software before you can qualify for the loan.
There are 3 essential credit scores you need to be concerned with. These include scores from Experian, Equifax, and TransUnion. The lender uses these three scores to determine your score.
Why not use only a single credit score to determine qualification? Well, the lender pulls a tri-merge credit report from all the bureaus. This is because each credit bureau reports your score differently. Let’s say your three scores are 620, 640, 680. The lender will pick the median score, which is 640 FICO.
When Should You Determine Your FICO Scores?
You need to focus on your FICO score some months before you apply for a loan. Why so? This is because any issues holding your back your credit score might take several months for resolution. Understanding your score in advance allows you to take the necessary steps to take it to the required minimum so that you can qualify for the loan. The recommended time that you need to understand your credit score is 6 months prior to the application for the loan.
Low FICO Scores and Your Mortgage Rate
The lender uses the credit score to determine your risk as a borrower. A low FICO score shows the borrower that you are at risk of defaulting on the loan. The borrower reacts by increasing the interest rate on the loan to cover this risk. A low credit score might have your application for the loan rejected.
What Can You Do to Fix a Bad FICO Score?
During the 6 months prior to applying for the loan, you can improve your credit score by following the following tips:
- Check for credit report errors and correct them if they exist.
- Set up payment reminders or sign up for automatic loan payments.
- Try to reduce the debt you owe.
- Pay your bills on time.
- Use a legitimate credit counselor.
These approaches will help you fix any bad credit so that you can qualify for a sizable loan without a higher interest rate or closing costs. This makes the loan affordable for you.