Your credit score is one of the most crucial factors lenders consider when approving your mortgage application. It also plays a significant role in determining what interest rate you’ll pay on your home loan. A mortgage calculator can help you calculate how your credit score and other factors may impact your ability to purchase a home.
Credit Scores: Understanding Yours
The FICO score is the most commonly used credit score by lenders, ranging from 300 to 850. It is calculated using data from three major reporting agencies — Equifax, TransUnion and Experian — using a proprietary formula based on these three major credit reporting agencies’ records.
A higher credit score translates to better mortgage terms, such as a lower interest rate and reduced fees. Conversely, having a low credit score makes it more likely that your application will be denied, which can be an unpleasant experience.
Generally, you want your credit score to fall between the mid-500s and 700 range, as this will make it easier for you to qualify for a mortgage loan. However, your exact credit score may differ depending on the type of loan and lender that you select.
Your credit score can be determined in several ways, but the most popular way is through a free report from one of the three major bureaus. These reports are updated monthly and provide an in-depth description of your debt status, payment history and credit utilization.
You can check your credit free of charge through services like Credit Karma and Credit Sesame. These sites often use VantageScore, an alternative model to FICO that gives a more precise assessment of your financial health.
How Your Credit Is Calculated:
Your mortgage credit score is calculated based on a number known as the credit utilization ratio, which is a percentage of all debt – including your mortgage balance – divided by your overall credit limit. The lower this number, the better off you’ll fare financially in the long run.
Your payment history plays an integral role in determining your credit score. Making timely payments can significantly boost your score; however, missing a payment could do significant damage to it.
A high debt-to-income ratio can also present issues. Lenders take into account your total monthly obligations (including your mortgage) and compare them with your income. Generally, lenders strive to keep this ratio below 43% for the best possible outcome.
Additionally, you may be required to pay for mortgage insurance which could reduce your monthly payment. Usually, this cost is added onto the amount borrowed at a fixed percentage.
Mortgage insurance can be eliminated once you’ve built up enough equity in your home to cover the amount owed. A mortgage calculator can estimate how much this additional expense will be, if not already included in your loan agreement.
The mortgage calculator can also help you estimate your monthly payment once you own the home outright. Once you know the loan amount, how long you plan to stay in it and your down payment, simply enter this data into the tool and it will automatically calculate an estimate for your monthly mortgage payment.