Lenders consider a variety of factors when issuing mortgage loans, including job history, debt-to-income ratio, income & assets, and the amount your down payment will be. However, their primary concern is credit score. It's important to check your credit report for errors and areas of improvement.
Your credit score may influence the type of loan you seek. FHA-insured loans generally have lower credit score requirements than conventional loans. It's often easier for a person to qualify who 1) lost a home in a short sale or foreclosure to get a new mortgage faster, and 2) has damaged credit. However, with an FHA-insured loan, you must pay mortgage insurance on the loan--which is often for the life of the loan, and higher than private mortgage insurance if you make a down payment of less than 20 percent.
Conventional lenders look more exclusively at credit score when issuing loans. Private mortgage insurance is automatically cancelled when your loan-to-value ratio reaches 78 percent.
The simplest way to boost credit score is to pay all your bills on time. Take these additional steps to boost your credit score over time:
- Pay off collections or judgments against you ASAP
- Update your over-the-limit and post-due accounts
- Reduce your credit card debt to no more than 25% of your credit line on each card
- Don't open new lines of credit
- Don't close your credit card accounts (you'll be using more of your overall credit limit if you do)
- Use a credit card you haven't used for a long time, then pay the bill in full. This demonstrates your ability to responsibly handle credit.
Want to know more? Read about how the FICO credit score is calculated and 7 mistakes that can lower your credit score.
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