Mortgage 101: Credit Knowledge & Homebuying

Posted by Laine Smith on 6/18/15 12:38 PM

The majority of homebuyers, 95 percent, know that credit is important when purchasing a home, according to a new Experian survey. Credit scores affect a homebuyer's loan eligibility and affordability, making credit awareness a must. Here's how homebuyer confidence starts with understanding the relationship between credit scores and homebuying.


Image courtesy of Stuart Miles at

People who know their credit scores feel significantly more prepared to buy a home than those who don't know their credit score (70% vs. 54%).

Preparation is key when buying a home, especially in terms of credit score. Mortgage lenders use your score to determine the risk of lending to you. The lower your score, the higher the lending risk. Lenders use your median FICO score from the three credit agencies - Experian, Equifax, and TransUnion - to represent your number.

FICO scores are computed based on five factors: payment history, amounts owed, length of credit history, credit types, and new credit. Here's how each component plays a role in affecting your credit score.

Be wary of online credit checks. They typically only represent one of your three scores and could misrepresent where your credit stands for mortgage financing. Only knowing one of your scores could mislead you to think your median score is higher or lower than it actually is.

The majority of homebuyers (74%) understand the impact of their credit scores in securing favorable interest rates.

FICO scores can range anywhere from 300 to 850. Scores above 740 are considered "top tier" credit and will get you the lowest interest rates. A minimum score of 620 is required by all mortgage loans delivered to Fannie Mae.

Your mortgage rate can be affected by your credit score (coupled with other factors, such as down payment), depending on what type of financing you are pursuing. Some loan types, such as USDA, FHA or VA loans, require a minimum credit score but as long as a borrower is eligible, they qualify for an across-the-board interest rate.

58 percent of future homebuyers indicate that they are actively working on improving their credit in order to qualify for a better home loan interest rate.

Your credit score isn't determined solely on recent actions. Negative marks stay on your credit report for as long as seven years. Prospective homebuyers are currently taking the following actions to improve their credit circumstance:

  • Paying off debt (55% of homebuyers)
  • Making on-time payments (54% of homebuyers)
  • Protecting credit card information from fraud/identity theft (20% of homebuyers)
  • Abstaining from opening new credit accounts (16% of homebuyers)

Other ways to improve credit include checking your credit report for errors, keeping a healthy mixture of installment and revolving credit accounts, and keeping old or unused credit accounts open.

Remember that your credit score wasn't damaged overnight, so don't expect immediate results. Be patient and persistent with improvements and consult with your mortgage banker on ways you can personally improve your score.

48 percent of homebuyers who do not know their credit score are concerned their credit status could hurt their ability to purchase a home.

If you are interested in purchasing a home, your first step is meeting with a mortgage banker for a pre-approval. During the pre-approval process, your lender will run your credit report and assess your eligibility for financing.

At Compass Mortgage, if your score isn't where it needs to be, we will help guide you on the path to a healthier credit score. Knowledge is power when it comes to credit score awareness.

If you have questions about your credit score and eligibility for home financing, contact one of our mortgage bankers or get pre-approved. For more information about home buying and financing, in general, download our free Mortgage 101 Handbook.

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