Home Loans Factors Used To Determine Your Credit Score
Below is a MRR and PLR article in category Finance -> subcategory Loans.
Home Loans: Key Factors Influencing Your Credit Score
Summary:
Credit scores significantly impact your ability to secure a home loan. Here’s a look at the key factors that determine your score.
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Securing a home loan involves careful consideration of your credit score. Here's a closer look at the factors that influence it.
Factors Influencing Your Credit Score
When you’re seeking a loan of hundreds of thousands of dollars to purchase a home, expect thorough scrutiny of your credit history. Everyone misses a payment occasionally, but will a single missed payment lead to a loan denial? Probably not. Your score is evaluated based on five primary factors:
1. Payment History (35%)
Your payment history is the most critical component, making up 35% of your score. Consistently meeting debt obligations on time boosts your score, whereas late payments can harm it. Be especially cautious of lawsuits, judgments, and tax liens. If prioritizing payments, settle higher obligations before smaller ones.
2. Debt Balances (30%)
The total balance on your debts also plays a significant role. Ideally, you should have ample available credit while owing as little as possible. Aim to keep your debt below 30% of your total credit limit. For example, if you have $20,000 in available credit, try to owe less than $6,000.
3. Length of Credit History (15%)
The duration of your credit history is another important factor. Long-standing accounts, especially credit cards, enhance your score, provided there's a history of usage. Oddly enough, unused credit is often less valued by lenders. The length of credit history contributes roughly 15% to your score.
4. Types of Credit (10%)
The types of credit you have account for about 10% of your score. While credit cards are acceptable, lenders prefer to see a mix of credit types, such as car loans, student loans, or previous mortgages. It's crucial to maintain timely payments on any non-credit card debt.
5. Credit Inquiries (10%)
Credit inquiries contribute to about 10% of your score. Lenders examine inquiries over the past six months. Each inquiry initiated through applying for credit can slightly lower your score, so avoid applying for new credit six months prior to seeking a mortgage.
Before You Apply
It's essential to review your credit reports before applying for a mortgage. Credit reporting agencies often face penalties for errors, and as many as half of all reports may contain inaccuracies. Ensure your report is clean and accurate to improve your chances of securing a loan.
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By understanding and managing these factors, you can better prepare to apply for a home loan.
You can find the original non-AI version of this article here: Home Loans Factors Used To Determine Your Credit Score.
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