What’s the big fuss about credit scores? One of the most important factors of getting refinancing or financing for a home is your credit. When lenders consider lending you money for a home, they will check your credit history. What they find when they run your credit history will have a huge impact on your options for a home loan.

Your credit score doesn’t tell everything about you, but it shows two key things. Your credit can influence your chances of mortgage approval. The purpose of the credit score is to assess risk. Lenders consider people with higher credit scores lower risk borrowers.

The credit score influences loan terms. A better credit rating improves your chances of getting the home loan. Your credit score also impacts how favorable the interest rate will be on your mortgage.

How Is Your Credit Score Calculated?

Lenders rely on your credit score, sometimes called your FICO score, to evaluate risk. A higher credit score is deemed lower risk. If you have excellent credit, you are considered the lowest risk.

Your credit score is calculated on several critical factors. These critical factors are:

  • Payment history – which is about 35% of your score
  • Amount of money you currently owe – about 30%
  • Credit history – about 15%
  • New credit applications – 10%
  • Type of credit used – about 10%

A Low Credit Score Might Disqualify You From A Mortgage

So what’s considered a good credit score? Generally:

  • 720 and above is excellent
  • 700 is good
  • 680 is average, and
  • 620 to 640 is usually the minimum to qualify for a traditional mortgage loan.

If you’re a home buyer with less than stellar credit, don’t be too discouraged. Lending institutions look at several factors when evaluating your mortgage application. Lenders require borrowers to have steady employment and income history, have a sufficient down payment and low debt. Another key factor is if you can really afford the mortgage loan you’re seeking – if your finances don’t support your payments, your lender could turn you down.

Higher Credit Score Could Lead To A Lower Interest Rate

Homebuyers don’t always realize the relationship between the interest rate and their credit score. Your credit score will have a huge impact on the mortgage interest rate of your loan. Buyers with better credit scores might qualify for lower interest rates.

Even a small increase of interest points could add up over the life of your mortgage. Use a mortgage payment calculator to calculate possible mortgage payments with different interest rates. You will find that even a few points can make a big difference over the life of your home loan.

Serious Illness Won’t Lock You Out of Home Ownership

There are actually several factors that make up your credit score. A fairly recent change is called your FICO Score 9. This version of the scoring algorithm could be particularly beneficial for anyone who has had a serious medical condition that dealt a major financial blow. Score 9 was designed to differentiate between medical and non-medical debt. That might be good news if you’re worried about your credit score after struggling to pay off mounting medical bills.

FICO® Score 9 treats medical bills sent to collections differently than other debts in the sense that it doesn’t impact one’s credit as much as non-medical debt.

You Can Boost Your Credit Score

For the best mortgage rate, it is best to plan ahead prior to applying. Step number one is to look at your credit score – is your credit history a little spotty? You can take the following steps if you want to boost your credit score.

Remember it might take some time for your new habits to be reflected in your credit score, so you may want to start now:

  • Pay all of your bills on time – credit cards, car loans, student loans, utilities, and even your rent all matter.
  • Don’t spend more than 30% of your limit on your credit cards. For example, if your card’s limit is $5,000, don’t spend more than $1,500.
  • Pay off your high-interest, high-balance credit cards first.
  • Don’t cancel your credit cards, even after paying off everything you owe on them. It helps to keep active lines of credit open.