A mortgage is a loan that you take in order to purchase a piece of property. Like any other loan, there is a risk to the lender that you will borrow the money and not pay it back. Although the risk to the lender is lower since the home or property acts as collateral to secure the loan, banks still do not want to have to foreclose on a home.

Therefore, banks and mortgage lenders will take a number of different steps to determine if you can qualify for a mortgage or not. One of the most important of these steps is checking your credit score to determine if you are credit worthy or not.

Your Credit Score

Your credit score is a number, of three digits, determined by a specific formula. The basic formula used in most cases was created by the company known as Fair Isaac, which is why you sometimes hear a credit score referred to as a FICO score. Scores generally range from the mid-300’s to 850, with a score above 720 typically considered to be a “good” score.

The formula used to determine your credit score looks at several different facets of your past borrowing behavior. For instance, one important component in determining your credit score is whether you have paid your bills on time in the past or whether you’ve ever been late or failed to pay. This is vitally important to creditors because if you failed to meet your obligations in the past, there’s a good chance you will do so again. Your payment history is responsible for determining around 35 percent of your FICO score.

Other factors that come into play when determining your score include how much you are actually using of the credit you have, how many accounts you have open and how old they are, the different types of credit accounts you have and how many “inquiries” you have (inquiries are placed on your report when you apply for new credit).

Typically, lenders like to see a low utilization of the cards you have, as maxing out all of your available credit can indicate a debt problem developing. Lenders also like to see a long credit history, a mix of different types of credit and few new applications that could indicate you are starting to run up a lot of debt.

How Your Score Affects Your Mortgage

Knowing how your score is determined and whether it is bad or good is absolutely essential, as your credit score has a direct impact both on whether you will be approved for a mortgage loan and on how much you will pay if you are approved for the loan.

A very low credit score can prevent you from having your mortgage approved at all, as the mortgage lenders will see you as a significant credit risk and a person likely to default. After all, if you haven’t handled your money and credit in the past, there’s nothing to convince the lender that you will do so in the future.

A high credit score, on the other hand, can make it much easier to qualify for a mortgage loan. When you do qualify, you will also be rewarded with the lowest interest rates available. The lower your interest rate, the lower it will cost to borrow the money and the lower your monthly payments will be.

Those with a credit score in the mid-range should be able to qualify for a mortgage but may have slightly higher interest rates. By looking at a mortgage calculator, you can see the specific impact these higher rates will have. However, putting a larger down payment down and shopping around for a lender can still make it possible to get an affordable mortgage with decent credit.