The Connection: Your Credit Score and a Home Purchase

What Is the Relationship Between Credit Score and a Home Purchase?Are you interested in purchasing a home? Many potential homebuyers have to be approved for a home mortgage loan in order to be seriously considered by sellers. An important aspect of being approved by a lender for a mortgage loan is an individual's credit score. What should potential buyers realize about their credit score and how it is related to buying a home?

Understand more about the relationship between one's credit score and credit history and what home mortgage loan applicants can do to improve their credit today.

Why Is a Credit Score Important to Lenders?

A credit score is one factor that helps lenders determine who may be considered a low-risk applicant. Low-risk applicants with relatively high credit scores can generally expect better terms on a home mortgage loan. Lenders want to approve those applicants for a loan that show the means and a history of making regular payments. Individuals with a low credit score may have made late payments in the past, defaulted on a loan or have accrued a significant debt-to-income ratio. All of these factors make potential lenders think twice about loaning an individual money.

Those who are turned down by a conventional lender for a home loan due to factors that include a low credit score may want to look into private lenders, in addition to taking steps to improve their credit score. Lenders want to work with those individuals with good to high credit scores as they are less likely to default on a mortgage loan.

Why Improve a Poor Credit Score?

It can take time to see positive changes in one's credit score. In the meantime, a person with a poor credit score may be turned down for a mortgage loan and another buyer may make an offer on a desired property. Improving one's credit score can better position a potential homebuyer to get approved for a home loan quickly and begin the closing process on a home.

What Are the Initial Steps to Improving a Credit Score?

Any potential homebuyer should first take a look at their credit score prior to applying for a home mortgage loan. It is easy to get a free credit report, review it for discrepancies and get an overview of credit history. If there are inaccuracies, report it to all three credit agencies, as changes in one report may not be quickly reflected in others.

Once a person addresses any errors, pays down outstanding debt and makes a history of regular payments, the credit score will soon rise. Be mindful that it is not a good idea to apply for an additional line of credit or a major loan right before or while also applying for a home mortgage loan. These actions may temporarily lower one's credit score.

What Is Revealed on a Credit Report?

A potential lender will find out quite a lot of information on an applicant through their credit report. In addition to a credit score, other valuable information is made available to a lender. A lender learns about the purchasing and payment history of an applicant over the past 7 years. What details will a lender be privy to through a credit report? Information on a credit report includes an applicant's:

  • Credit lines
  • Outstanding debt
  • Payment history
  • Length of credit history
  • Any new credit

A lender is most interested in finding out about an applicant's payment history and overall debt. A person's payment history is used to determine how likely a person is to make regular payments. One's overall debt, if significant, may interfere with a person's ability to pay back a large loan. A lender may view negative public records and delinquent accounts in a person's payment history. A person's credit score takes into account many factors and is important for a lender to consider when approving an applicant for a conventional mortgage loan.

What Are the Benefits of a Good or Excellent Credit Score?

A good or excellent credit score, as well as a long credit history of regular payments, may make it more likely for borrowers to be approved for a home loan for a Painted Desert home. One advantage to applying for a home loan with a good score include lower interest rates, which make paying off a home mortgage loan easier and less expensive over the lifetime of a loan.

Individuals have the power to change their credit score to their benefit through specific actions. An excellent credit score, in addition to putting down 20 percent toward the purchase of a home, may be the best way for first-time homebuyers to be approved for a home mortgage loan and buy a home.

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