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Your credit score plays a crucial role when applying for a mortgage. Lenders will review your credit report and credit scores to determine if you qualify for a loan and at what interest rate. So checking your credit before applying for a mortgage is highly recommended. This article will explain why you should check your credit, how to check it, what lenders look for, and tips to improve your credit score if needed.
Why Check Your Credit Score?
There are a few key reasons why you should check your credit score before applying for a mortgage loan:
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Errors on your credit report can reduce your score inappropriately – which could mean a higher interest rate and less money in your pocket – so it is important to check your credit report and correct any errors well before you apply for a loan Errors are surprisingly common, with around 1 in 4 credit reports containing some mistake.
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Knowing your credit scores helps set expectations. While factors like your income assets and down payment amount also impact your mortgage terms, your credit score gives you an idea of what rates you may qualify for.
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Time is needed to improve credit. Building credit takes patience and diligent financial habits. Reviewing your score early gives you a chance to take steps to boost it before applying.
Checking your credit yourself does not negatively impact your credit scores. As long as you order your own credit report rather than authorizing a lender to pull your report, it is considered a “soft inquiry” that does not affect your score.
How to Check Your Credit Score
You can obtain your credit reports and scores from several sources:
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AnnualCreditReport.com – Federal law allows you to access your credit report from each of the three major credit bureaus (Experian, Equifax, TransUnion) once per year for free. This does not include your scores but lets you review your reports for errors.
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Your credit card company – Many issuers like Chase and Capital One now provide free monthly access to your credit scores on your statement or online account.
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Third party websites – Sites like CreditKarma offer free credit scores using slightly different VantageScore credit models. Other sites like MyFICO.com charge access fees.
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Nonprofit credit counseling agencies – Local nonprofit credit counseling services often provide credit reports and FICO scores for free as part of their financial reviews.
No matter where you get your scores from, aim to check your reports from all three bureaus, as they may contain somewhat different information that could impact your mortgage eligibility.
What Credit Scores Do Lenders Want?
Most mortgage lenders today use your FICO credit scores when evaluating loan applications. While auto lenders and credit card companies often use industry-specific scores, your core FICO scores are what matter for home loans.
Within the FICO scoring model that ranges from 300 to 850, you will have three main credit scores, one from each bureau. Aim for scores above 700 to get the best mortgage rates. Here are general FICO credit tiers and terms you can expect:
- 760+ (Excellent) – Top tier interest rates and easiest approval
- 700-759 (Good) – Competitive interest rates and likely approval
- 680-699 (Fair) – May qualify for conventional loans with additional fees
- 620-679 (Poor) – Higher rates and costs, may not qualify without repairs
- Below 620 – May not qualify for conventional mortgages
In addition to your core FICO scores, mortgage lenders may use industry-specific score models like FICO Mortgage Scores and VantageScores to complement their review. But your basic FICO scores will give you the best indication of where you stand.
What Credit Factors Do Lenders Review?
When calculating your FICO credit score, the Fair Isaac Corporation looks at five main factors from your credit reports:
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Payment history (35% impact) – Having no late payments will maximize this portion. Past delinquencies can significantly hurt your score.
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Amounts owed (30% impact) – Owing a small portion of your available credit limits your score less than high balances. Keep credit usage under 30%.
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Length of credit history (15% impact) – Having long, established accounts improves this portion. Too many new accounts can lower it.
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Credit mix (10% impact) – Experience managing different types of credit (credit cards, auto loans, mortgages, etc.) helps here.
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New credit applications (10% impact) – Too many new accounts in a short period can negatively impact this portion.
In addition to your credit scores, lenders will review your full credit reports to see details like your current debts, past payment problems, collection accounts, bankruptcies, tax liens, and foreclosures. These “red flags” may negatively influence your approval chances and loan terms.
Tips to Improve Your Credit Score
If your credit score is not where you want it to be, take action as early as possible before applying for a mortgage. Here are proven ways to help raise your credit score:
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Pay all bills on time. Set up automatic payments whenever possible. Payment history is the biggest factor in your scores.
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Lower credit utilization. Pay down balances and limit new charges. Owing less than 30% of limits boosts your score.
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Monitor credit reports. Fix any errors you find by disputing them. Mistakes could unjustly lower your score.
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Limit new credit. Space out new applications by 6+ months. Too many new accounts can lower your score.
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Ask for credit limit increases. Higher limits help keep overall utilization low as balances grow.
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Pay down debt. Knocking down balances on credit cards and loans has a major positive influence on amounts owed.
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Consider credit mix. Applying for an installment loan like an auto loan may improve your mix of accounts.
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Dispute outdated negatives. Getting old public records and late payments removed helps offset past credit mishaps.
With diligence and patience, these tactics can help you see your credit scores gradually climb higher. Be sure to check your progress periodically.
Give Yourself Time to Check and Repair Your Credit
Ideally, start checking your credit 6-12 months before applying for a mortgage. This gives you a window to address any credit report errors and take measures to improve your credit scores if they are not ideal. The higher your credit scores, the better mortgage terms you can obtain, which saves significantly on interest costs over the long run.
While an extensive credit history is built over time, checking your scores today gives you an assessment of where you stand. Monitor your credit periodically and take steps to boost your profile. Then when you are ready to buy a home, you can approach mortgage lenders with confidence knowing your credit is mortgage-ready.
How can shopping for a mortgage impact your credit?
When exploring mortgage options, your credit score typically only takes a hit when you obtain a loan preapproval from a mortgage lender. That’s because getting preapproved involves a “hard” credit inquiry, meaning the lender looks at your credit history and score. A soft credit check mortgage preapproval is hard to come by since lenders want a close look at your financial history during this process. Mortgage Icon Understanding credit checks
A soft credit inquiry does not impact your credit score or require your permission. It is typically done for informational purposes and not for lending decisions. A hard credit check involves a lender pulling your full credit report from a credit bureau with your permission and is typically done to help make a lending decision.
That said, you can explore another soft credit check mortgage option. If you obtain a prequalification — a step down from a preapproval — you shouldn’t see any change to your credit score because prequalifications involve a “soft” credit pull. In other words, you can see if you prequalify without hurting your credit score. Star Icon
Keep in mind: Some lenders use the terms “prequalification” and “preapproval” interchangeably. Be sure to confirm the prequalification doesn’t require a hard credit check before moving forward.
Shop for your mortgage within a short timeframe
When you’re ready to get preapproved for a mortgage and want to compare offers from multiple lenders, aim to do it within a 45-day time frame. That’s because in this window, all of the credit inquiries different lenders make appear as one inquiry on your credit report.
While your score might be affected by the single inquiry, it won’t be impacted as much as multiple inquiries on your report.
How Do I Check My Credit Score Before Applying For A Mortgage? – CreditGuide360.com
FAQ
Should I check my credit score before buying a home?
If you’re planning to buy a home this year, we recommend checking your credit reports and scores as soon as possible. The better your credit history, the more likely you are to receive a good interest rate on your mortgage loan.
Does your credit score matter if you get a mortgage?
And the score a mortgage lender uses may be lower than the one you see when you check your own credit. Finding out late in the game that you have a lower credit score could be an unwelcome surprise. You might end up with a higher interest rate and a smaller home buying budget than you’d planned.
Should you apply for a credit card before getting a mortgage?
Applying for a credit card after getting a mortgage is recommended, as applying before could cause a slight dip to your FICO® Scores and keep you out of the running for the best rates. Here’s an article about three credit mistakes to avoid before applying for a mortgage.
Do I need a credit report before applying for a mortgage?
For mortgage applications, most lenders will request your report from all three major credit bureaus: Equifax, TransUnion and Experian. So it’s a good idea to look at your own credit reports before you apply for a mortgage. You want to make sure they are accurate and free from any errors that could drag down your score.
Should you get a mortgage with a high credit score?
Still, it’s best to have the highest credit score possible before you apply for a mortgage. In fact, the average credit score for a borrower getting a purchase loan is 738, according to Optimal Blue’s May 2024 Market Advantage report. 1. Check your credit reports and scores
What credit mistakes should you avoid when applying for a mortgage?
When applying for a mortgage, avoid the following three credit mistakes: not paying any attention to your credit at all, neglecting to check your credit reports for errors, and racking up new debt. Your FICO® Scores are generated using information on your credit reports.