If you will take on a mortgage to pay for your new home, check your credit score immediately. This number determines how much money you can borrow and the interest rate you will pay for it.
Credit agencies, the largest being Equifax, TransUnion, and Experian, analyze your credit history and assign you a credit score. This three-digit number ranges from 300–850, the average being around 723. The higher the number, the lower the credit risk. Mortgage lenders review your score to determine your creditworthiness, projecting how likely you are to repay a loan.
How Your Credit Score is Calculated
Points are assigned based on the items in your credit history: payment history, amounts owed, length of credit history, new credit and types of credit.
The most common score used is the FICO score. The name comes from the independent company who created it, Fair Isaac and Company. They break down your score in this way:
• Payment history – 35%
• Amounts owed – 30%
• Length of credit history – 15%
• New credit – 10%
• Types of credit – 10%
Your number of credit inquiries is also factored into your score. Multiple non-mortgage inquiries suggest to lenders that you may be taking on additional debt.
Improve Your Credit Score First
If your credit score is low, defer your home purchase and work to raise your score. By doing so, you can borrow more and pay much less interest.