Applying for a mortgage to finance your dream home can be an intimidating prospect. One thing that confuses many people is hearing that simply applying for a mortgage or another form of credit might lower that all-important credit score. This is technically correct, but the effect of credit applications on credit scores is minor.
Credit Applications and Credit Scoring
Credit scores are simply a way of measuring the risk a lender takes by extending credit to an individual. Statistically, credit risk increases when someone applies for a mortgage or other type of credit. However, credit applications count for just 10 percent of your total credit score. By contrast, your record of paying bills promptly and your credit utilization rate account for about two-thirds of the overall score. If your credit record for those areas is in good shape, you don’t need to be concerned. In addition, the credit scoring system makes allowances for people who apply for credit for projects like buying a home.
Rate-Shopping and Credit Scores
If you make a single credit application, it is likely to take less than five points off of your credit score. However, consumers typically need to “rate shop.” This means making several applications in order to find the best deal. The credit scoring software is designed to disregard multiple credit applications for mortgages, car loans and student loans that occur within a 30 day period. This keeps rate shopping from affecting your credit score.
A Good Credit Score for a Mortgage
When you apply for a mortgage, the lender is going to base a decision on your credit record and credit score. A score of 720 is excellent. A high scores means your mortgage application will probably be approved. You may also receive a lower interest rate. For borrowers with moderately good credit, there are some options. Fannie Mae and Freddie Mac may approve mortgage applications if a borrower has a score of 620. The Federal Housing Authority will accept a score of 580.
Checking Your Credit
Before you put in the application for a mortgage, check your credit history. You can do this for free through the Federal Trade Commission’s provider of free credit reports, AnnualCreditReport.com. If you find any errors, you can have them corrected before submitting your mortgage application.
Although applying for a mortgage is a complicated process, you really have nothing to worry about when it comes to your mortgage application affecting your credit score. Don’t believe us? Get an expert opinion when you work with a First Team Real Estate agent. Reach out and we’ll get you connected with an expert in your area.
