Understanding your credit score

Your credit score plays an important role when you’re buying a home. Understanding what your score is and how it affects your ability to get a mortgage is essential.

A credit score is used by mortgage lenders to estimate what kind of risk you are. The higher the score, the less likely you are to default. The lender can offer you a lower interest rate. By the same token, the lower the score, the higher the interest rate you will pay.

The FICO score and how it’s calculated

The terms credit score and FICO score are used interchangeably. FICO stands for Fair Isaac Corporation, the company that created the software used to calculate your credit score. 

The FICO score is calculated by looking at a number of factors:

35% - Payment History
30% - Amount Owed
15% - Length of Credit History
10% - Types of Credit Used
10% - New Credit

Knowing is half the battle

Knowing your credit score prior to applying for a loan will help you avoid an unwelcome surprise. If your credit score is lower than you’d like, don’t panic. It’s not the end of the world. You can do a few things prior to applying for a mortgage to clean up your score and save yourself some money. 

There are a number of free credit reporting services that you can use to check your score. You’re looking for false reports, for issues that can be cleared up quickly by working with creditors or disputing them. Your lender and REALTOR® can help identify areas that can be cleaned up prior to making your final application. Improving your score can save you money in the long run. 

As a rule, you’ll need a minimum score of 620 to qualify for a mortgage. Interest rates go down as the score goes up. A score of 760 is needed to get the best rate possible.

Understanding what is in a credit report can help you as you proceed through the home buying process. In the long run, a higher credit score can save you tens of thousands of dollars over the course of your mortgage.