How Your Credit Score Affects Loan Approval

When you are ready to obtain a mortgage at the best possible interest rate, your credit score is one the most important factors in receiving a pre-qualification or approval. In addition, your credit score and history go a long way towards determining what interest rate you may receive from your lender. Your credit score is a number that is determined from the information in your credit report. Credit scores can range from 300 to 850, depending on the credit scoring agency. The higher the number, the better your credit rating. Your credit score helps a lender establish your willingness and ability to pay. Following excellent money-management practices over time will improve your credit and enhance your potential to secure an affordable home loan.

  • Components of a credit score
  • Payment History - 35 percent

    Your payment history has one of the biggest impacts on your overall score. It is essential that you pay bills on time. Every late payment, collection, judgment, or bankruptcy significantly lowers your score.

  • Amounts Owed - 30 percent

    Your available credit is compared to the total amount you owe. The amount of available credit you're using on revolving accounts is heavily weighted. A good rule is to owe 40% or less of the total amount of credit extended.

  • Length of Credit History - 15 percent

    How long have you been borrowing money? Overall, if your accounts have been open longer, the more positive the impact on your credit score. It may be best not to close a credit card you've held for several years, even if you maintain little activity on the account.

  • Types of Credit - 10 percent

    Maintaining various types of credit (credit cards, installment loans, home loans) can be beneficial to your score. In general, closed loans (such as a car loan that has been paid off) combined with active credit, demonstrate that you have experience managing your money. However, too many open installment loans can negatively affect your credit.

  • New Credit - 10 percent

    Have you applied for new credit? Be aware that your credit score can be negatively impacted when you apply for too much new credit in a short period of time.