Getting approved for a mortgage involves being prepared with several things, including having a down payment saved, completing your mortgage application, and collecting all the supporting documents like your ID, employment history, annual income, and other items required by the lender. But aside from all the paperwork, there is one major factor that affects your approval — your credit score.

Your credit score is a number that represents your credit history and a risk factor for the lender. It’s checked in advance of approving your mortgage application by lenders to determine if you’re a good candidate for a loan or not. 

Checking your credit score is easy, as most mobile banking apps have a feature that shows you your credit score so that you can keep an eye on your financial health.

A healthy credit score is essential for first-time home buyers and home buyers in general, especially with the stress test looming and the need for a down payment of up to 20% of the purchase price. If your credit score is low, don’t lose hope. There are many ways to improve it to increase your chances of getting approved for a mortgage. 

What credit score should you be aiming for?

A credit rating can range from 300 to 900, with 760 – 900 being considered an excellent credit score, and 680 typically being the minimum credit score lenders will require before approving your mortgage loan.

How is your credit score calculated?

When applying for a mortgage, mortgage lenders will review your credit score for a number of reasons. They want to determine if you can afford your mortgage loan, if you’ve had trouble paying off debt in the past, and if you’re likely to pay them back as agreed upon in your mortgage contract. 

Payment history makes up roughly 35% of your credit score and is based on how you’ve been making payments towards your credit, loans, and bills. Outstanding debt or credit utilization makes up about 30% of your score, and it’s best to keep your credit card balance at 0 or as low as possible compared to your credit limit. Credit history, separate from payment history, makes up about 15% of your score, while the new credit and credit mix makes up 10% each.

So what do all these percentages mean?

That means that in combination your credit score is based on five areas of your financial life, including the lifespan of your credit, your payment history, the number of inquiries into your credit history, public records, and the amount of credit you have available versus how much of that credit you’ve used.

How can you improve your credit score to secure a mortgage?

Tip #1: Review your payment history

If you have missed payments in the past, making them on time will help increase your score, even if you can only make the minimum payments. An old phone bill that you didn’t pay a couple of years ago can come back to haunt you. This information helps lenders determine your trustworthiness and ability to pay back a mortgage loan. It’s important to review your credit history and make sure there are no missed payments or outstanding bills that could raise red flags for lenders. Lenders also consider the number of times your financials have been looked into in the past, and multiple inquiries can negatively impact your credit rating. By considering these factors, you can work to improve your credit score and increase your chances of being approved for a mortgage loan.

Tip #2: Use your credit wisely, avoid hitting your credit limit, and avoid applying for multiple lines of credit

Lenders may view individuals who heavily rely on credit as a risky investment, and this could negatively impact your ability to secure a loan. Having multiple lines of credit show up on a credit report could be interpreted as a sign of financial instability. This can be especially harmful as lenders also look at public records to determine financial well-being, including any history of bankruptcy or bills turned over to collection agencies.

But remember, having different types of credit is good for your score (credit card, car loan, line of credit, etc.). Just be sure to make payments on time to avoid having too much debt – which can end up hurting your score in the long run.

Tip #3: The longer you’ve had an open credit amount, the more it positively affects your credit score. 

If you have an old credit account that you opened when you were younger, that’s a good thing. However, if you transfer an old account to a new one, the new account will be considered new credit, which could hurt your score. It may be wise to keep the older account open, even if you don’t use it as frequently, as the length of your credit history is a key factor in determining your creditworthiness. 

Tip #4: Pay down as much debt as you can before applying to get pre-approved for a mortgage.

Make sure that the debt you have accumulated on your credit cards is paid down as much as possible before applying for a mortgage. If you can’t pay them off or down quite a bit before applying for a pre-approval, you may want to wait a few months until you can. This will give you a better credit rating at the time your application is being reviewed and possibly could mean a lower interest rate when they do approve you.

Tip #5: Get a mortgage co-signer

If you’re struggling with your credit score and want to own a home, having a mortgage co-signer like a family member or close friend can be an option. However, make sure that you have confidence in your ability to make payments as the co-signer is legally responsible for making payments if the primary borrower defaults. If you’re asked to be a co-signer, make sure you’re willing and able to be their financial backup for the long term. 

Getting approved for a mortgage with a good credit score requires more than just making the minimum payments on your credit accounts. To improve your credit score and increase your chances of approval, it’s important to maintain a good balance between the amount of credit you have available and how much you’ve spent, as well as keeping your credit utilization low and avoiding multiple loan applications in a short period of time.

As a professional mortgage broker and financial advisor, I can guide you through the process of improving your credit score so that you can secure the mortgage you need. Whether you’re planning to buy a home soon or in the future, I can help you achieve your home-buying goals by assessing your financial positioning and helping you develop a personalized plan to get you there. If you’re worried about your credit score, don’t hesitate to contact me for assistance. Together we will find you the right mortgage solution to make your dream of home ownership a reality.