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One of the key drivers in whether you can qualify for a home loan, finance a car, or even get a job is your credit score. This three-digit figure is based on several factors, including your history of debt payments, how long you’ve had credit and your outstanding loan obligations. If you’re preparing to apply for a loan, you need to understand how credit scores work. Here’s a helpful guide. 

Why Credit Scores Affect Loan Requests

Credit scores typically range from 350 to 850. The higher the score, the more favorable it looks to lenders. This number shows how responsible an individual has been with managing their debt and making on-time payments. Lower scores generally show slow, late, or a lack of payments. While a home loan applicant may get approved, they will likely pay a higher interest rate, which means higher monthly payments. 

home loanYour credit score also provides guidance on how lenders set the loan terms. For instance, a larger down payment may be required if your score is on the lower end. However, there are federal loan programs that don’t require a large or any down payment for first-time homeowners. This applies to those with high or low credit scores. Certain loan fees may also be waived for borrowers with higher scores. 

How to Improve Your Credit Score

If you plan to apply for a home loan, check out your credit report first. You’re entitled to a free report each year from the three national credit reporting bureaus: Equifax®, Experian®, and TransUnion®. The reports will provide a history of all of your financial debt. Examine them for mistakes and take the necessary steps with each bureau to correct them. 

Next, continue to make on-time payments on any outstanding loan or credit card debt. Lenders like to see a consistent pattern of responsible financial management. Maintain a balance between your debt and income. Many lenders will review your debt-to-income ratio (DTI), which divides your monthly debt with your gross monthly income. If the percentage is less than 40%, you’re typically in good territory. Avoid making large purchases, such as taking out car loans or getting new credit cards before applying for a home loan. The additional debt could negatively impact your credit score. 

 

Whether you’re buying a home for the first time or refinancing, the loan application process can be overwhelming. Deuane Woodard, Loan Consultant – loanDepot® has the extensive knowledge to walk you through it all. Based in North Richland Hills, TX, he brings more than 30 years of lending experience to discuss your unique financial needs and recommend customized loan options. To learn more about improving your credit score, call (817) 875-6043 to arrange a friendly consultation. Visit the website to start your digital application.

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