Why is a credit score important when buying a house
Aug 18, 2022

When applying for a mortgage, your credit score is vital for them to consider granting you this benefit. It also helps lenders and banks determine what loan you may qualify for or whether you will qualify at all.

So what is a perfect credit score to buy a home? It’s not so much that you need a specific score. At Soheil States, we consider it most important to know how your credit score will affect the rate, loan amount, and required down payment.

Another factor to consider is that the standards of mortgage lenders are not the same as before the COVID-19 pandemic. On top of this, many lenders ask for higher credit scores and larger down payments. In this sense, the general availability of credit decreased in both March and April, according to a report published by the Mortgage Bankers Association, an industry trade group.

What factors go into a credit score?

Your credit score comprises multiple factors, from how quickly you pay your bills to how long you’ve had a credit card with on-time or late payments. We will explain in more detail five main factors that go into determining your credit score:

Payment history.
Lenders want you to have a history of consistent, on-time payments. Any missed, late, or underpaid payments will show up as a negative mark on your credit report, and that will affect your score. Make sure you consistently pay your bills on time and in entire if you can. This factor has the most significant impact on your credit score, accounting for 35% of the calculation.

Balances due.
It’s known as a credit utilization ratio, calculated by dividing all your debts by the amount of credit available to you. You must keep it below 30% to get a better credit score. This is the second most crucial factor in determining your credit score, at 30%.

Length of credit history.
This is the average of how long your credit accounts have been open. It’s important to keep old accounts open even if you no longer use them, as it could affect the age of your credit history. This factor represents 15% of your credit score.

Credit mix.
This refers to the number of types of credit you have. Lenders generally want to see a diverse mix of installment credit, revolving credit, and available credit to demonstrate that you can handle various types of credit responsibly and without delinquency. This requirement represents 10% of the score.

Recent activity.
Recent movements in your credit accounts are taken into account here. Many credit inquiries in a short period can affect your score, so avoid applying for too many new accounts at once. The factor contributes 10% of your credit score.

To access your credit score, check your credit card statement or your online bank account. If you can’t find it, use the help function on the bank or issuer’s website for help. Some services can also provide you with your credit score for a fee.

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