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Lenders base the likelihood of you paying your mortgage on your credit score and credit history. Having an excellent credit score means that lenders trust you to honor your mortgage terms and will reward you with a great interest rate.

If you want to ensure the best interest rate and terms when qualifying for a home loan, start worrying about shoring up your credit as soon as possible. FICO says that you can pay up to $2500 less per year on $200,000 mortgage over a 30-year term. That’s serious dough.

Why Your Credit Score Counts

In a perfect world, you’d walk into the bank, ask for a loan, and your loan officer would say, hello, welcome, sign here, congratulations, you have a mortgage! But in the real world, banking standards require that a bank must prove credit worthiness before giving any borrower a loan. The way the bank does this is by looking at your past credit behavior.

FICO, or the Fair Isaac Co, is a company that specializes in predictive analytics. They review information in a wide range of credit situations to quantify consumer behavior. They then use this information to assign an individual score that forecasts a borrower’s likelihood of paying their bills on time.

Banks make their money by making trustworthy loans and offering them at competitive interest rates. They depend on a FICO credit score to decide whether to offer you a loan and to determine what interest rate they’ll charge.

How Your Credit Score Affects Your Mortgage

The minimum credit score required for a conventional home loan is 620. If you’re seeking an FHA loan, that minimum is 580. Also, different lenders have different requirements based upon how much risk they’re willing to accept for a lower credit score.

Although you can still qualify for a loan even if your credit score is not optimal, the real issue is that you may not qualify for every loan product at every bank, and if you do, your interest rate may be too high for you to afford the loan.

Lenders look at more than your credit score when determining your credit worthiness. They also look at your employment history, your debt load, and how much down payment you plan to pay. All this information combined determines what your interest rate will be and can also mean the difference between a requirement of 20% or more down payment or as little as 3.5% down payment.

The Bottom Line

If you’re unhappy with your credit score, you can fix it, but you must remember that it won’t happen overnight. The first thing that you should know is that your credit score is not a personal judgement. It is a tool used by financial institutions to help determine their continued business practices, so don’t take it personally. Work to improve it.

Your credit score is a one-time glimpse into your financial conduct. It’s determined by your economic behavior and all behavior is subject to change.

Before you look for a home, look at your credit history. Confirm that everything in your credit report is correct, and if it’s not, fix the errors. You can contact creditors personally or you can use a credit-repair company.

After you do that, re-evaluate your budget. Start by paying off as many small debts as possible and work your way up to paying down on large ones.

Most of all, don’t stress. If you want a home now, your chances are good that you’ll get one. Even after you sign on the dotted line, you can improve your credit score and credit worthiness, and apply for a better loan with your better credit.