When you start thinking about buying a home, one of the first steps a lender will ask you to take is getting pre-approved. A pre-approval letter shows sellers that you are serious and that a bank has looked at your finances and agreed to lend you a certain amount. But before you even sit down with a lender, there is one number that matters more than almost anything else: your credit score. Knowing what your credit score is and how it affects your mortgage can save you a lot of headaches and help you get the best deal possible.
Your credit score is a three-digit number that tells lenders how likely you are to pay back borrowed money. It is based on your history with credit cards, car loans, student loans, and any other debts you have had. The most common scoring model is the FICO score, and it runs from 300 to 850. The higher your score, the more trustworthy you look to a lender. A score of 740 or above is generally considered excellent, while scores under 620 may make it tough to qualify for a conventional mortgage.
When you get pre-approved, the lender will pull your credit score from one of the three major credit bureaus: Equifax, Experian, or TransUnion. They will use that score, along with your income and assets, to decide how much money they are willing to lend you. But the number does more than just decide yes or no. It directly affects the interest rate you will pay. A difference of just 50 points can mean thousands of dollars in extra interest over the life of a 30-year loan. For example, if you have a 720 credit score, you might get an interest rate of six and a half percent. If your score is 680, that rate could jump to seven percent or more. Over thirty years, that extra half percent could cost you an extra twenty thousand dollars or more on a typical home loan.
So what can you do to improve your credit score before you apply for pre-approval? The most important thing is to pay all your bills on time, every month. Payment history is the biggest factor in your credit score, making up about thirty-five percent of the total. Even one late payment can drop your score by many points. If you have missed payments in the past, the best plan is to catch up on those accounts and then stay consistent for at least six months to a year before you apply for a mortgage.
The next biggest factor is how much of your available credit you are using. This is called your credit utilization ratio. If you have a credit card with a ten thousand dollar limit and you owe nine thousand on it, you are using ninety percent of your available credit. That signals to lenders that you are stretched thin. Ideally, you want to keep your utilization below thirty percent. That means if you have ten thousand in total credit limits across all cards, try to keep your total balance under three thousand. Paying down credit card debt is one of the fastest ways to boost your score.
Another thing to watch out for is opening new credit accounts right before you apply for a pre-approval. Every time you apply for a new credit card or loan, the lender does a hard inquiry on your credit report. Too many hard inquiries in a short period can lower your score. It also makes you look like you are desperate for credit, which is a red flag for mortgage lenders. The rule of thumb is to avoid opening any new credit accounts for at least six months before you plan to get pre-approved.
You should also check your credit report for errors. Mistakes happen more often than you might think. A payment that was reported late when it was actually on time, or an old account that should have been closed but still shows a balance, can drag your score down. You are entitled to a free credit report from each of the three bureaus once a year through AnnualCreditReport.com. Look over each report carefully. If you find an error, you can dispute it with the credit bureau. Getting a mistake fixed can sometimes raise your score by twenty or thirty points.
One common question homeowners ask is whether they should pay off old debts before getting pre-approved. In general, yes. But be careful. If you have a collection account or a charged-off debt that is several years old, paying it off might actually cause your score to drop temporarily because the account gets updated as recently active. That said, most mortgage lenders require that collection accounts be paid off or settled before they will approve a loan. Talk to your lender about the best timing for paying off old debts.
Finally, remember that your credit score is not the only thing a lender looks at during pre-approval. They will also consider your income, your job stability, and your debt-to-income ratio. But your credit score is the gatekeeper. A strong score can open doors to better rates and more loan options. A weak score can close those doors or make them very expensive.
The best time to work on your credit is six months to a year before you plan to buy a home. Check your score, fix any problems, pay down balances, and keep paying everything on time. When you finally sit down with a lender to get pre-approved, you will be in a much stronger position. You will know what to expect, and you will have the peace of mind that comes from being prepared.
