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When you’re buying a home, one of the most important factors is your credit score. It’s important to understand how it affects your mortgage loan.

When you buy a home, the interest rate you’ll pay for the money you borrow will primarily be determined by your credit score. Your credit score is a three-digit number that can range from 300 to 850. A higher credit score increases your chances for getting approved for a loan and obtaining a lower interest rate.

Your credit score represents your calculated measure of risk. Lenders look at your credit report as an indication of how likely you are to make your payments and make them on time. People with higher credit scores are deemed safer risks and may be eligible for lower interest rates.

Some of the factors that go into determining your credit score:

• Payment history — How well have you repaid other loans or debts in the past? Did you miss any payments? Did you fail to pay back a debt entirely? Have you declared bankruptcy or had anything go into collections?
• Amount owed — How much debt, including credit card debt, do you currently have? Are your credit cards maxed out? What other outstanding loans do you have, such as car loans or student loans? How much do you owe on them? The more you owe, the lower your credit score may be.
• Length of credit history — When did you establish each credit card account and what is the timeline of your credit card activity? The longer you’ve been establishing credit, the higher your score will be.
• New credit — Have you applied for new credit recently, including credit line increases, and how many accounts have you opened recently.
• Combination of your credit — The more ways you spread out your credit (cards/mortgages/car loans), the higher your score will be.

If you have a low credit score, there are things you can do to raise your score in preparation for purchasing a home. Things such as paying off credit cards to lower your debt-to-income ratio, avoiding large purchases, such as a new car or new furniture, and avoiding applying for new credit.

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VIDEO TRANSCRIPT:

MIRA: So my number one advice would be the first thing to do when you decide to buy a home is to look over your credit report. Because that it is going to determine what your mortgage rates are going to be and your capacity in terms of what you can buy.

MIRA: So in order to know what you qualify for, what mortgage rates you’re going to get, it all relies on your credit report. And so it’s important to know what’s in there, what your score is. And if it’s not up to par, to bring it there before you even start looking at homes.

TINA: Credit score is one of the most important items because we want to make sure that you have a good payment history and you’re able to make your future mortgage payments on a timely basis.

TINA: If a homeowner has some credit issues before you go into the home buying transaction process what you can do is we can go ahead and run a credit report for you upfront and then your mortgage banker can work with you on certain items, maybe a collection showing up on your credit report, maybe a lien or a judgment that you can contact the merchant directly to clear those items away before you go into the home buying process.

RHONDA: If you have credit cards, definitely pay down those balances so that the debt ratio is less. If you have loans that are outstanding, especially student loans, which have such an impact on getting a mortgage, and you’re not paying on those, start paying on those. A little is better than nothing.

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