How Your Credit Score Affects Your Home Buying Leverage and What You Can Do About It

learn how credit score affects home buying in Montana

Buying a home is by far one of the greatest American dreams. And why wouldn’t it be? The opportunity to own your own home and maintain a quality standard of living for you and your family is a fulfilling venture. Homes in Montana, particularly Bozeman and surrounding areas like Belgrade, are of keen interest to those who are looking for a great job market and excellent quality of living, making it an ideal location to put down roots. So, in preparing to make your homebuying purchase, your credit score will be very important. Let’s take a look at how you can maintain and improve your credit score.

Aim for as High a Credit Score as Possible

If you are thinking of buying a new home, one of the most important aspects of the process is the health of your credit score. It is one of the very first things that mortgage lenders consider when you apply for a loan. The higher your number is (between 300 and 850), the better your chances will be that the lender will consider you a “good risk.”

While a score lower than 700 may not directly hinder your chances of getting a loan, it could create less than favorable terms for you when it comes to interest rates. The lower your credit score, the higher the loan interest rate is likely to be.

Interest rates equate to the total mortgage monthly cost, and the higher the rate you ultimately secure, the more dollars you will be accountable for. Therefore, if you have a higher credit score and are able to lock in a lower interest rate, your money will take you further.

Factors Included in Your Credit Score

There are a few factors lenders will look at to determine your ‘creditworthiness.’ These 5 factors are used to help calculate your credit (or FICO®) score.

  • The Length of Your Credit History. Lenders like to see that you have been able to maintain your lines of credit for a significant period of time. Your credit history makes up 15% of your FICO® score and it includes both the ages of your newest and oldest accounts.
  • Your Payment History.  Lenders can determine the likelihood of you paying back your debt to them by looking at your credit history. Even one missed payment can have a negative impact on your credit score. This factor accounts for 35% of your score.
  • How Much Credit You Are Using. Using more than 30% of your available credit is considered a negative to lenders and creditors. Therefore, you should aim to use less than 30% of your credit availability. Credit utilization accounts for 30% of your score.
  • Your Credit Mix. Lenders look well upon those who have a mixed credit portfolio. They might have a student loan, mortgage, car loan, as well as credit cards. Being able to successfully manage all of these shows lenders how well you are able to manage your credit. This element accounts for 10%.
  • Your New Credit. If you are actively acquiring new credit and/or lenders are making hard inquiries into your credit report, this could impact your score negatively as this often indicates increased risk. New credit and new credit inquiries account for 10% of your total score.

What You Can Do to Improve Your Credit Score

Avoid new credit applications. Applying for additional credit cards right before or during the process of trying to secure a mortgage can lower your score. Wait until after you have the loan to apply for more credit.

Pay your bills on time. Your credit report reveals if you pay your bills on time. Making payments on-time will keep your credit score attractive, which in turn will attract lender interest.

Check your credit report. Whether or not you suspect your credit score is accurate, it’s always a good idea to check your credit report for errors. These errors can negatively impact your score and you’ll want to take steps to correct them. Various credit report websites will also reveal what’s holding you back from raising your score.

Pay down debt. Lenders will look at how much debt you carry compared to your income. Knowing this, it’s a great idea to start working on lowering your debt before applying for a mortgage.

If you are interested in moving your family into one of the many beautiful Prescott Ranch homes for sale, your first step toward obtaining that home is to keep an eye on your credit score and take action to get your score as attractive as possible.