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Connection Between Your Credit Score and Interest Rate

Knowing what you can afford is half the battle when it comes to considering your mortgage options. The other half is knowing your credit score, how it affects your interest rate, and the role it plays in your mortgage qualification. Of course, the higher your credit score, the better chance you have of getting approved and getting a great interest rate for your loan. However, even if your credit score isn’t perfect, there are plenty of options to qualify for a home loan.

What You Need to Know About Your Credit Report: Your credit report is a historical document that lists all your financial transactions relating to what you’ve borrowed and paid, your record of re-payment, and how much credit is now available to you. This is what lenders use to determine your creditworthiness as a candidate for a loan, as it tells them how capable you are of managing and paying off your mortgage.

Your credit report includes:

  • All of your debts, including credit cards, student and car loans.
  • Your history of paying back those debts, including any late payments.
  • Any accounts that have been reported to a collection agency, ranging from credit card bills, utility bills or any other bill that has been paid late (or not at all.)
  • Information that is on your public record, such as tax liens or bankruptcies.
  • Any credit inquires made by companies considering giving you credit, including whether or not your application was approved.

What Your Need to Know About Your Credit Score Your credit score is calculated based on a number of factors, including your credit history, amount of debt you owe and how you’ve managed it. This is the number lenders use to decide if you’re a viable candidate for a loan, and the likelihood of making your monthly payments on time. Scores can be as low as 300 points, and as high as 850.

Your credit score is based on some of the following criteria:

  • The frequency of your payments, including how often you’re on time, and how late you are.
  • All of your debts, including open accounts such as credit cards, car and student loans.
  • The length of time you’ve had credit, including how long your accounts have been open and how often you use them.
  • The ways in which you’ve managed your credit.
  • The limits on your credit cards, including how often your limits have been raised, and how close you are to your limit (which will lower your score if you’re at your limit.)
  • The frequency of which you’ve applied for new credit, and how often you’ve added new debts to your credit report. (If you’ve applied for numerous credit lines at the same time, it can negatively affect your score.)
  • All the different kinds of credit you have, including loans, credit cards, mortgages and more.

Obviously, it’s favorable to have a high credit score, because you have more options available to qualify for financing of a mortgage, and gives you the opportunity to qualify for a lower interest rate. However, if your score is below the national average of 725, you can still qualify for loan, however, may qualify for a higher interest rate, and there will be less options available to you for to qualify for financing. If your score is 600 or below, we recommend working with a housing counselor to help rebuild your credit.

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