This guide explains the role of credit in the mortgage application process and steps to bring a low score up.

When you apply for a mortgage, you will be required to complete a detailed loan application for your mortgage lender. As part of the application review process, the lender will usually order a copy of your personal credit report.

Your credit report, meanwhile, will include your personal credit score. This score plays a large part not only in whether you are approved for a mortgage loan, but also the interest rate you will pay on the loan.

Credit scores: How they work

Lenders obtain credit reports on borrowers from one or more of the three major credit reporting bureaus in the U.S.: Equifax, Experian and TransUnion. Each credit reporting bureau will assign you a different three-digit credit score, generally ranging from 300 to 850.

The higher your score, the stronger your credit rating. According to NerdWallet.com, credit score quality is generally viewed as follows:

• 300-629: Poor credit
• 630-689: Fair or average credit
• 690-719: Good credit
• 720 and higher: Excellent credit 

So what kind of credit score do you need to be approved for a home loan? Different types of mortgages have different requirements, as do different banks. But here are some broad guidelines:

• FHA mortgage: 580 or higher
• VA mortgage: 620 or higher
• Conventional mortgage: 620 or higher

Please note: Just because you meet any of the above minimum credit scores, this doesn't mean you will qualify for a mortgage. 

5 tips to boost your credit score

Given the important role of the credit report and credit score in the mortgage loan application process, it’s usually smart to take steps to boost your credit score before applying for a home loan. Here are a few strategies that can help improve your credit score:

1. Be sure to pay bills on time

Timely payment of bills is one of the biggest factors in the computation of your credit score. According to CreditKarma.com, this single factor may account for 35 percent of your overall score.

So one of the best ways to build and maintain solid credit is simply to pay your bills on time — month after month, year after year. Even a single late bill payment can negatively impact your credit score.

2. Limit the number of credit cards you use

Carrying balances on a number of different credit cards tends to damage your credit score. Therefore, it may be wise to pay off some of these balances as soon as you can and use just one or two credit cards going forward.

If you can’t afford to pay them off now, consider using one card’s balance transfer feature to consolidate balances onto a single card.

3. Don’t necessarily close old credit accounts

One common misconception about credit scores is that old accounts should be closed and removed from the credit report once balances have been paid in full. This is not necessarily so.

If you made payments on the account in a timely manner, this will actually help your credit score. This is because it demonstrates responsible use of credit on your part. In addition, closing a card that you have had for a long time can also shorten your credit history, which could affect your credit score. For more on the implications of closing credit accounts, read this Credit Karma post.

4. Manage your debt-to-credit ratio

This is the percentage of credit that’s available to you that you’re actually using. For example, if your credit limit on a card is $10,000 and you currently have an outstanding balance of $5,000, your debt-to-credit ratio would be 50 percent.

In general, a lower ratio is better for your credit score. Ideally, you should try to keep your debt-to-credit ratio at 30 percent or lower.

5. Be consistent in your use of credit

Try not to do anything out of the ordinary from a credit perspective during the months leading up to your mortgage application. This could raise a red flag and possibly indicate additional credit risk.

For example, try not to make an unusually large purchase on credit or suddenly start making lower payments on a revolving credit account than you have in the past.

Order your credit report ahead of time

Before you begin the mortgage loan application process, obtain a copy of your credit report. This will enable you to find out what your credit score currently is, as well as examine the report in search of any potential errors.

Visit AnnualCreditReport.com to order a free copy of your credit report from one of the major credit reporting bureaus listed above. Note: Some other websites purport to offer free credit reports, but they may have hidden fees.

It’s not uncommon for errors to appear on credit reports, so review your report carefully. If you spot any errors, contact the credit bureau right away to let them know and begin the process of getting them corrected.

Contact information for each of the credit reporting bureaus is located on their websites at Equifax.com, Experian.com and TransUnion.com.

For more information about getting a home loan

Please find a loan officer if you have questions about the role of your credit report and credit score in the house mortgage application process.

This article is provided as a free service to you and is for general informational purposes only. Cadence Bank makes no representations or warranties as to the accuracy, completeness or timeliness of the content in the article. The article is not intended to provide legal, accounting or tax advice and should not be relied upon for such purposes.