The home buying process can be confusing, but…
You can improve your mortgage interest rate by improving or repairing your credit score. Lenders look at your credit score to help them identify the mortgage rate that you qualify for when you are applying for a home loan. There are a few things you can do to repair bad credit, and there are a few tips to help you avoid damaging your credit.
Understanding Your Credit Score
Credit scores are simply a numerical ranking of your credit performance. The best way to look at a credit score is like your evaluation for promotion. There are many parts to this evaluation like, performance, conduct, physical fitness, marksmanship, time in service and time in grade. Your NCO or OIC then weighs each factor in accordance with its importance and determines your final evaluation for promotion. Credit scores are no different and look at the following factors:
- Payment History – 35% of your overall credit score is determined by your payment history, which is the single most impactful factor of your credit score.
- Outstanding Debt – your debt holds a 30% weight in your overall credit score. Carrying balances of less than 35% of your available credit limit is ideal. Balances that use 70% or more of your credit limit are having a negative impact on your score.
- Account Age –15% of your overall credit score is based on the length of time accounts have been open and established. It is helpful to have accounts with a long history reporting to the credit bureaus.
- Inquires and Credit Diversity – 10% of your overall credit score is represented by these factors. Be sure you aren’t authorizing lenders to pull your credit report needlessly and that your debts are spread amongst various loan products (credit card vs. car loan).
These factors are scored on a curve type system where your performance is compared directly to other individuals. Credit scores range from 300-850, where anything over 700 is good and anything under 600 needs improvement.
Credit Repair Strategies
If you have bad credit, there are things you can do to repair your credit. Lenders look at your credit score when you apply for a VA home loan – or any home loan – as one of the factors in determining your mortgage rate. A higher credit score means you are a good credit risk and will likely qualify for a lower interest rate on your home loan. Protect your credit. Learn more about the things our customers have done to improve/enhance their credit standing.
Credit Checklist
Find out if you’re helping or hurting your credit score with our credit checklist. If you are interested in applying for a VA mortgage and have questions about repairing your credit score, just give us a call at 888-256-5387.
Free Annual Credit Report
You are entitled to receive a free copy of your credit report from each of the nationwide consumer credit reporting bureaus every year. To obtain your credit report, visit www.annualcreditreport.com, an official site sanctioned by the credit bureaus to provide you with free access to your report. It’s a good idea to put this on your calendar and submit your request for your free credit report annually.
Debt-to-Income Ratio
Obviously, the lower your debts, the better off your debt-to-income ratio will look to lenders. However, we all need to incur debt to own big-ticket items like houses and cars. So not all debt is bad. It is simply important to manage debt carefully. It is also worth noting that, unlike conventional mortgage lenders, lenders of VA home or refinance loans take into account the expenses of owning a home, including utilities, for example, in considering your debt-to-income ratio. Learn more about how your debt-to-income ratio plays a role in qualifying for a VA mortgage.
