How can my credit report impact my mortgage?
How does a credit score affect the mortgage you can qualify for? Your credit score can affect many areas when you apply for a mortgage, so check your credit report before you start the process.
Simply put, the information listed in your credit report helps to shape your credit score. Here’s how such a simple number could affect buying a home.
If you’re ready to see where you stand and how your credit score affects buying a home, explore our Digital Mortgage pre-approval today!
What is a credit score?
A credit score is a three-digit number, usually from 300 to 850, that reflects to lenders how well you manage debt. Lenders use it to assess your reliability in repaying loans. A higher score could improve your chances of getting favorable mortgage terms.
Where do credit scores come from?
Credit reporting agencies Experian, Equifax and TransUnion base credit scores on data. Lenders use different credit scoring models to assess borrower risk.
Which factors determine my credit score?
These key factors shape your credit score.
Payment history
Payment history accounts for 35% of your credit score. Making payments on time is critical, as even one missed payment could lower your score.
Credit utilization ratio
Your utilization rate is how much credit you use compared to your total credit limit. Ideally, keep it under 30%. For example, if your credit limit is $10,000 and your credit card balance is $3,000, you're using 30% of your available credit.
Length of credit history
The longer your credit history, the better. If you’ve had a credit card for, say, 10 years and managed it well, it enhances your credit worthiness.
Types of credit used
Lenders like to see a credit mix — credit cards, mortgages, auto loans and student loans. A diverse credit profile demonstrates your ability to handle various financial responsibilities.
Recent credit inquiries
Every time you apply for credit, your report will show a “hard inquiry,” which could slightly lower your score. Multiple hard inquiries in a short time might raise concerns for lenders.
What goes on my credit report?
Here’s what lenders will find in a credit report.
Personal information
This includes your name, address, Social Security number and employment information. While it doesn’t change your score, it’s important to make sure this information is correct. Errors can cause delays, problems with identity verification and risks of identity theft.
Credit accounts
Your credit report lists open and closed credit accounts, such as credit cards and loans, along with balances and payment history. Public records, bankruptcies, foreclosures and court judgments appear here and could raise red flags for lenders.
How can I see my credit report?
Follow these steps to access your credit report.
Visit AnnualCreditReport.com
This is the official website where you can get free credit reports. You may request one report every 12 months from each of the three major bureaus.
Choose your credit bureau
Select which bureau’s report you want to see. You can see all three at once or spread them out over the year for regular monitoring.
Verify your identity
You’ll need to answer security questions and provide personal details, including your Social Security number, to verify your identity.
Download or view your report
Download or view your report online, review it carefully for accuracy and note potential issues.
What qualifies as a 'good' credit score?
Lending institutions may use different credit scores depending on their requirements. A score above 670 is good. A score over 740 is very good. A score of 800 or more is excellent.
The higher your score, the more options you’ll have for mortgages, personal loans and other loans.
Is 700 a good credit score?
While it’s not in the excellent range, a score of 700 falls within a good credit score range. It’s high enough for others to see you as a trustworthy borrower. This could help you get better mortgage rates and terms.
Is a 900 credit score possible?
A credit score of 900 may sound like a myth since most credit scoring models cap at 850. However, it’s possible to hit 900 in some models.
What are the benefits of a good credit score?
A good credit score offers more than just better loan rates. Here are some additional ways it could improve your financial life.
Lower insurance premiums
Insurance companies often use credit scores to assess risk. A higher score could result in lower premiums for auto, home and even life insurance.
Easier rental approval
Landlords often check credit scores when evaluating potential tenants. A strong credit score could help you secure a rental without providing extra guarantees.
Access to premium financial products
With a good credit score, you could qualify for a broader range of financial products. This includes credit cards with higher rewards and lower interest rates, as well as more favorable mortgage loan terms.
How does my credit score affect loan eligibility?
A higher credit score could make you eligible for more favorable mortgage interest rates and terms. Here are the minimum credit scores for various mortgage options.
FHA loans
Government-backed FHA loans are popular among first-time homebuyers because of their more lenient credit and down payment requirements. At Rate, you could qualify with a credit score as low as 500.
However, it's important to note that FHA loans require mortgage insurance premiums, which will increase your monthly payment.
VA loans
VA loans also backed by the government are available to Veterans as well as active-duty service members and their eligible spouses. They tend to have lower interest rates than conventional loans, which could save borrowers thousands of dollars over the life of the loan.*
- These loans often come with no down payment and don’t require mortgage insurance.
- Rate does not have a minimum credit score for VA loans.
Conventional loans
Conventional loans, which are not insured by the government, usually come with stricter credit requirements.
Most lenders want a credit score of at least 620. If your score is 700 or higher, you may get better terms. This can include lower interest rates and larger loan amounts.
How long do items stay on my credit report?
Here's how long negative marks can linger on your credit report and what you should know about their effects on your ability to borrow.
Late payments
Late payments stay on your credit report for up to seven years from the date of the missed payment.
The effects decrease over time, but a late payment can hurt your credit score. Making on-time payments is key to reducing the damage.
Bankruptcies and foreclosures
Bankruptcies and foreclosures are more serious negative items that could stay on your credit report for seven to 10 years, depending on the type.
Chapter 7 bankruptcy, for instance, remains for 10 years, while Chapter 13 bankruptcy typically lasts for seven years.
These items can hurt your chances of getting credit. However, their effects decrease over time as you build good credit habits.
How can I build my credit score?
These strategies will help you maintain and improve your score over the long term.
Open your first credit account
If you’re looking to build credit, consider a secured credit card or credit-builder loan. To demonstrate creditworthiness, use them responsibly and avoid credit card debt.
Pay off debts
Paying off debts is one of the best ways to boost your credit score. It also frees up your income to allow you to focus on saving or investing.
Maintain a low debt-to-income ratio
Debt-to-income ratio (DTI) measures the percentage of your monthly income used to repay debt. Most lenders prefer a DTI ratio below 36%, ensuring you have enough income for other financial obligations.
How long does it take to rebuild my credit score?
Rebuilding a credit score depends on the severity of the issue. You can see improvement in three to six months with good practices. However, it may take seven to 10 years to fully recover from a major setback like foreclosure.
How does my credit score affect my ability to buy a house?
A higher credit score helps you qualify for a mortgage with a lower interest rate. Even a small difference in interest rates can save you thousands over the life of the loan.
Does applying for a mortgage hurt my credit score?
Yes, applying for a mortgage through pre-approval could temporarily affect your credit score. The pre-approval process involves a “hard inquiry,” which could lower your credit score by five to 10 points.
However, if you manage your credit responsibly, your score should recover within a few months.
Can I get a mortgage pre-approval without a credit check?
Unfortunately, no. Pre-approval always needs a hard credit check. Lenders must look at your financial history to see if you qualify for a loan.
However, if you're worried about the effect on your credit score but still want an estimate of how much you might be able to borrow, you could consider pre-qualification.
Pre-qualification is a less formal process that doesn’t involve a credit check. Instead, it relies on information you provide, like your income and assets. This can give you a rough idea of how much you can borrow.
How many times can I check my credit score without hurting my credit?
Checking your own credit score, known as a "soft inquiry," does not affect your score. You can check your credit score for free as often as you like without any negative consequences.
In fact, monitoring your score regularly is a good financial habit that can help you spot potential issues early.
Does closing a credit card hurt my credit?
Yes, closing a credit card account can lower your available credit. It may also raise your credit utilization rate and shorten your credit history.
Being an authorized user on another person's account can help you maintain a longer credit history. This is true even if you close your own account.
How does identity theft affect my credit score?
Identity theft occurs when someone steals your personal information to commit fraud or other crimes. This can seriously damage your credit as thieves can open accounts, take out loans or make purchases in your name.
How can I be sure I haven’t been the victim of identity theft?
Use credit monitoring services to check your credit report. Look for new accounts or inquiries you don’t recognize. If something seems wrong, investigate it right away.
What should I do if my Social Security number is stolen?
If someone steals your Social Security number, contact Experian, Equifax or TransUnion. Place fraud alerts and file a report with the Federal Trade Commission (FTC). Also, let your bank know. Speed is crucial in preventing further damage.
How can I start the mortgage process today?
Once you understand what’s in your credit report and how it affects your credit score, the next step toward homeownership is pre-approval.
Pre-approval helps you create a clear budget for your home. It also makes you more credible to sellers. This gives you an edge in competitive markets.
At Rate, our Digital Mortgage pre-approval is fast and simple. You can fill out the application online in just 15 minutes. Apply now to take one step closer to your new home.
*Savings, if any, vary based on the consumer’s credit profile, interest rate availability, and other factors. Contact Rate for current rates. Restrictions apply.
Rate is not a credit repair company or similarly regulated organization under applicable laws and does not provide credit repair services. Where available, recommendations, tips and education materials are provided to you for educational purposes only. The services are intended to provide you with general information and assist you with identifying your options. The information is provided only to enable you to make your own choices about your personal finance, and is not intended to provide legal, tax or financial advice. We do not provide any services to repair or improve your credit profile or score, nor do we provide any representation that the information we provide will actually repair or improve your profile. Consult the services of a competent professional when you need any type of assistance.
Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply, contact Rate for current rates and for more information.
All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. Rate does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error free. Some information in the publication may have been provided by third parties and has not necessarily been verified by Rate. Rate its affiliates and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action. Rate does not provide tax advice. Please contact your tax adviser for any tax related questions.
Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply, contact Rate for current rates and for more information. All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. Rate, Inc. does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error free. Some information in the publication may have been provided by third parties and has not necessarily been verified by Rate, Inc. Rate, Inc. its affiliates and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action. Rate does not provide tax advice. Please contact your tax adviser for any tax related questions.