If you’re seeking to purchase a new home, one of the first things you should look at is your credit score. Your credit score is one of the most important factors a bank will consider when it comes to approving you for a mortgage. A higher score usually equates to a lower interest rate, which will save you many thousands of dollars over the life of the loan.
It’s important to know the difference between consumer credit and real estate mortgage credit. The former is relayed by well-known credit reporters such as Credit Karma or Credit Sesame. The scores between reporters like these can vary widely between each other because of some differences in calculation.
When you’re shopping for a mortgage, the score that matters comes from a triple-merged credit report. Typically, this score is reported by agencies like Experian, TransUnion, Equifax, etc. These agencies are cross-referenced with each other to ensure accuracy, and mortgage lenders rely on the lowest middle score between them. Your score is determined by such things as credit card payments, timeliness of payments, the ratio of your outstanding credit compared to your credit limit, how long you’ve had established credit accounts, and so on.
Credit scores usually range between 300-800 and are an important factor in determining what a mortgage lender would consider as your theoretical risk (your likelihood of repaying the loan). The lower your credit score is, the higher the chance a mortgage lender will think that you might have a problem in repaying your loan in a timely fashion. As such, should your credit score be on the lower side, your interest rate will be higher since you’ll be regarded as possibly having more difficulty in repaying your loan.
Simply put, a lower credit score means a higher interest rate for borrowers, which will add up over the months and years.
Your triple-merged credit report isn’t just a number, though. There’s a lot of moving parts behind this score that’s so influential in determining the interest rate you’ll pay. Contact us to find out more about how it works.