How vital is your credit report to you acquiring a good interest rate on your mortgage loan? Let’s put the answer this way, one cannot happen without the other.
The most important determining factor to getting a good interest rate on a mortgage is your FICO score. But what is your FICO score? And where does it come from.
To answer the first question, your FICO score is a number lenders use to determine your credit worthiness. In other words, the score determines the likelihood of you repaying your debt. The higher the score, the more likely you are to get a loan with lower interest rates.
To determine your score, this is what is considered:
Payment History Obviously, late payments affect your credit score. So making sure that you make timely payments on all of your debts will boost this part of your score. Makes up approximately 35% of your score.
How Much You Owe It’s good to have several accounts with balances, provided you are making timely payments and will continue to pay them off. However, having too many accounts may mean that all of your money is going to paying off debt. What this means to lenders is that you may default on a loan if you go beyond your financial limits. Makes up approximately 30% of your score.
Length of Credit History The score will consider how long your accounts have been established; and it will also look at the age of your oldest account. And, it will also look at the last time you used your accounts. Makes up approximately 15% of your score.
New Debt The score will look at your newest account. Having a number of inquiries around the time you opened the new account may be interpreted as shopping around for a lower rate, which is considered a smart thing to do. Makes up approximately 10% of your score.
Diverse Credit The score will consider what types of accounts you have. Having a good mix of credit cards accounts, auto loan, and mortgage loan accounts will raise your score. However, having too many can also lower your score. Makes up approximately 10% of your score.