How Does My Credit Score Affect My Pre-Approval and Loan Terms?

If you’re thinking about buying a home, your credit score is one of the most important numbers in your life! Your credit score can affect your chances of getting pre-approved for a mortgage and play a big role in the loan terms a lender will offer you—like your interest rate and down payment requirements.

Here’s what you need to know about how your credit score impacts pre-approval and loan terms, plus some tips on how to boost your score before you apply.

What is a Credit Score, and Why Does It Matter?

Your credit score is a three-digit number that shows how well you manage your debts and financial obligations. Lenders use this score to decide how “risky” it is to lend you money. A high credit score makes you look like a responsible borrower, while a low score can make lenders feel unsure about lending you a large amount.

Credit scores range from 300 to 850:

• Excellent: 750 and above
• Good: 700-749
• Fair: 650-699
• Poor: Below 650

How Does My Credit Score Affect Pre-Approval?

When you apply for pre-approval, lenders look at your credit score to determine if you meet their minimum requirements. Most lenders have a minimum score you need to qualify for certain types of loans. For example:

• Conventional Loans typically require a credit score of at least 620.
• FHA Loans (insured by the Federal Housing Administration) can go as low as 580, but having a higher score can still help you get better terms.
• VA Loans and USDA Loans don’t have strict credit score minimums, but most lenders still prefer a score of 620 or higher.

If your score meets these requirements, you’ll likely be eligible for pre-approval, but higher scores can offer more benefits.

How Does My Credit Score Impact My Loan Terms?

Beyond just getting pre-approved, your credit score has a big effect on the loan terms a lender can offer you. Here’s how it impacts key areas:

1. Interest RateYour interest rate is the cost you pay to borrow money, and it’s heavily influenced by your credit score. Higher credit scores usually qualify for lower interest rates, which can save you thousands of dollars over the life of the loan. For example, a difference of just 0.5% in interest can lead to significant savings on a 30-year mortgage.
   
2. Down Payment RequirementsA strong credit score may allow you to make a smaller down payment, especially with conventional loans. For example, if you have an excellent credit score, you might only need a down payment of 3% for some loans. With a lower credit score, lenders may ask for a larger down payment to reduce their risk.
   
3. Private Mortgage Insurance (PMI)For conventional loans, if you don’t make a 20% down payment, you’ll need to pay for private mortgage insurance (PMI), which protects the lender if you default. With a higher credit score, your PMI cost is typically lower, reducing your overall monthly payment.
   

How Can I Improve My Credit Score Before Applying?

If your score isn’t quite where you’d like it to be, don’t worry! There are several steps you can take to improve it before applying for a mortgage:

1. Pay Down Existing DebtLenders look at how much of your available credit you’re using. Try to pay down any high credit card balances, which can lower your credit utilization ratio (the percentage of your available credit that you’re using). Ideally, keep this ratio under 30%.
   
2. Make All Payments On TimePayment history is one of the biggest factors in your credit score. Set reminders or automate your payments to ensure you’re paying all bills on time. Even one missed payment can hurt your score.
   
3. Avoid Opening New Credit AccountsEach time you apply for new credit, it temporarily lowers your score. If you’re thinking about applying for a mortgage soon, try to avoid opening new accounts for a few months before applying.
   
4. Check Your Credit Report for ErrorsMistakes on your credit report can lower your score. Get a free copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) at AnnualCreditReport.com and look for errors. If you find any, dispute them to have them corrected.
   
5. Be Patient and ConsistentImproving your credit score takes time. Start focusing on good habits, like paying bills on time and reducing debt, at least six months before you plan to apply.
   

The Bottom Line

Your credit score plays a key role in the home-buying process. While it’s possible to get a loan with a fair or even lower score, working to improve your score can mean better loan terms, a lower interest rate, and potentially big savings over time. So, take steps to boost your credit, and you’ll feel more confident (and possibly even save money) as you move toward buying your dream home!