Your credit score is one of the most important factors lenders consider when deciding whether to preapprove you for a mortgage. It reflects your financial history and gives lenders an idea of how likely you are to repay your loan. Understanding how your credit score impacts preapproval can help you prepare for the process and secure the best terms possible.
What Is a Credit Score?
A credit score is a three-digit number that represents your creditworthiness. It’s calculated based on your credit history, including factors like payment history, outstanding debts, length of credit history, and types of credit accounts.
Credit scores range from 300 to 850 and are grouped into categories:
• Excellent (740 and above): Best loan terms and lowest interest rates.
• Good (670–739): Competitive rates but slightly higher than those for excellent credit.
• Fair (580–669): May qualify for a loan but with higher interest rates.
• Poor (Below 580): Limited options, and may require a larger down payment or alternative lending options.
How Does a Credit Score Impact Preapproval?
1. Determines Loan Eligibility
Lenders use your credit score to assess whether you meet the minimum requirements for a mortgage. A higher score increases your chances of approval, while a lower score may result in rejection or limited loan options.
2. Affects Interest Rates
Borrowers with higher credit scores qualify for lower interest rates, which can save thousands of dollars over the life of a loan. Conversely, lower scores typically mean higher rates, increasing your monthly payments and overall costs.
3. Impacts Loan Terms
A strong credit score can give you access to more favorable loan terms, such as smaller down payment requirements or higher loan amounts. With a lower score, lenders may impose stricter terms or require private mortgage insurance (PMI).
4. Determines Debt-to-Income (DTI) Ratio Tolerance
While your DTI ratio is a separate factor, a higher credit score may allow lenders to be more flexible with DTI requirements. If your score is lower, lenders may demand a lower DTI to mitigate risk.
How to Improve Your Credit Score Before Preapproval
If your credit score needs improvement, take these steps before applying for preapproval:
1. Pay Bills on Time
Payment history is the most significant factor affecting your credit score. Set up automatic payments or reminders to avoid missed or late payments.
2. Reduce Outstanding Debt
Lowering your credit card balances and other debts can improve your credit utilization ratio, which is the percentage of available credit you’re using.
3. Avoid Opening New Accounts
Opening new credit accounts can lower your average account age and result in hard inquiries, which temporarily impact your score.
4. Check for Errors on Your Credit Report
Request a free copy of your credit report and review it for inaccuracies. Dispute any errors to have them corrected.
5. Keep Old Credit Accounts Open
Closing older accounts can shorten your credit history, negatively impacting your score. Keep accounts active, even if you’re not using them regularly.
What Credit Score Do You Need for Preapproval?
While requirements vary by lender, these are general benchmarks for different types of loans:
• Conventional Loans: Minimum credit score of 620.
• FHA Loans: As low as 500, but with higher down payment requirements.
• VA Loans: Typically no minimum, but most lenders prefer 620 or higher.
• USDA Loans: Minimum of 640.
If your score is below the threshold for the loan you want, consider improving it before applying.
How Lenders Evaluate Your Credit Score
In addition to your credit score, lenders also review your full credit report, which includes:
• Your payment history (e.g., late payments or defaults).
• Types of credit accounts (e.g., credit cards, auto loans).
• Length of your credit history.
• Recent credit inquiries and accounts opened.
Final Thoughts
Your credit score has a significant impact on the preapproval process, influencing everything from eligibility to interest rates and loan terms. By understanding its role and taking steps to improve your score, you’ll increase your chances of getting preapproved for a mortgage with favorable terms.
A strong credit score doesn’t just open doors to homeownership—it also saves you money over time. Start building or maintaining good credit habits today to set yourself up for success in your homebuying journey.