In this post, we will talk about why Credit Scores in Mortgage Pre-Approval matter. Lenders use credit scores to assess borrowers’ financial standing.
A borrower’s creditworthiness is expressed numerically through this score, which lenders can access by thoroughly examining an applicant’s credit report.
A strong credit score shows lenders that you are an excellent steward of their funds. There are various strategies you can employ to improve your score, and rates, and make pre-approval easier for mortgages.
Why Credit Scores in Mortgage Pre-Approval Matter
Let’s dig into why credit scores in mortgage pre-approval matters. Below are the most important ones.
Payment History
Lenders will perform a credit report review and payment history analysis in order to ascertain whether you’re a reliable borrower and how much a mortgage loan can be afforded.
Once this assessment has taken place, lenders will issue you a conditional commitment letter which includes your loan amount and interest rate.
For this evaluation, lenders will contact one or more of the three major credit bureaus – Experian, TransUnion, or Equifax – and request your report as hard inquiries – these requests could cause your score to dip by several points and remain on your report for two years or longer.
To protect your credit scores and avoid having them adversely affected during the mortgage pre-approval process, pay your bills on time and try to maintain low balances wherever possible.
Doing this can increase your credit score while decreasing lender risk – helping you qualify for mortgage terms that meet your financial needs and goals while saving thousands over time!
Credit Utilization Ratio
Your credit utilization ratio measures how much debt you’re carrying compared to your total revolving credit limits. It accounts for about 30 percent of your credit score and should be given due consideration; an excessively high utilization ratio could signal to lenders that you’re overextending yourself or having difficulty managing debt repayment.
An appropriate credit utilization ratio demonstrates your fiscal responsibility as a borrower, typically recommended at less than 30% of your credit limit by experts.
One effective strategy to lower your credit utilization ratio is paying down balances, however, since lenders report your balances at the end of your billing cycle it may take some time before your scores reflect these payments.
Another method would be contacting credit card companies directly and asking for an increase in credit limit; however, this could result in a hard inquiry on your report.
Length of Credit History
Your credit history depends on a range of factors. How much you owe, your credit utilization ratio, and types of accounts such as installment loans or credit cards all play into this equation – however only 15% of your score relies on its length alone.
Mortgage lenders also take into consideration your credit history to evaluate how long it would take for any outstanding debts to be cleared and whether or not you could manage a new mortgage payment comfortably. Also, the longer your history is maintained, the greater your score will become.
After being pre-approved for a mortgage loan, your lender may check your credit again – this time with hard inquiries that can have an adverse impact on your score.
To minimize this effect, try shopping mortgage lenders within 15 to 30-day windows so that multiple inquiries will not have an adverse impact.
New Credit Accounts
Mortgage lenders use your credit report and score to assess if you qualify for the loan, how much can be borrowed, and the interest rate that applies.
Being preapproved can save time searching for homes you won’t qualify for and save thousands over time with interest savings alone!
To become preapproved, applicants typically submit a hard inquiry on their credit report. While this can temporarily decrease scores by several points, NerdWallet suggests contacting multiple lenders within a short period (such as 30 days) in order to ensure each lender counts as one inquiry for scoring purposes.
Mortgage pre-approval also requires reviewing your credit reports, with one in three credit reports containing errors that could have an adverse impact on getting approved or increasing interest rates.
By taking steps to improve your credit before seeking mortgage pre-approval, errors can be reduced significantly and prepare you for home searching more easily.