Buying a home is a significant accomplishment for many people. It can be a big step towards stability and financial security. However, your credit score is a crucial factor in obtaining a favorable mortgage rate. According to a National Association of Realtors 2023 report, “78% percent of recent [home] buyers financed their home purchase.” Lenders, like our team of Bozeman lenders at Bank of Bozeman, will evaluate your credit score and Montana mortgage rates to determine the terms of your mortgage.

Improving your credit score for a mortgage not only increases your chances of securing your mortgage but also helps you secure a more favorable interest rate, saving you a significant amount of money in the long run. As your Bozeman home loan experts, we want to set you up for success so you can secure the home of your dreams. Read on as we explain why credit scores are important and share helpful steps you can take to raise your credit score to get a better mortgage rate.

Why Improving Credit Score for a Mortgage Rate Matters

Low or high credit scores show your risk to lenders. Your score can signify to a bank your ability to repay a loan and whether or not you have good financial practices. According to Experian, one of three US credit reporting agencies, poor and low credit scores range from 300 to 669. Good to excellent credit scores range from 670 to 850. A low credit score means you could pay higher interest because you may not qualify for a better rate. It can also cause the monthly payments on your mortgage to be higher. A lower credit score can also leave you with fewer loan options to take advantage of when purchasing a home.

On the other hand, a high credit score can help you qualify for lower mortgage interest rates and fees. It can lower your monthly payments, and it may mean that you will have more loan options. Over time, this can save you on the cost of your home. So, it is essential to take steps to improve your credit score if you are financing your home purchase.

4 Steps to Improve Your Credit Score

Remember: building your credit takes time. It is a gradual process that requires persistence. However, if you are diligent and follow our helpful advice, you will eventually be in a better position to buy a home that fits your vision and budget. Below are four steps you can take to begin to improve your credit score for a mortgage:

  1. Pay Your Debts on Time
    Your payment history accounts for 35% of your credit score and is considered the most influential factor that impacts your credit. Payments that are later than 30 days can lower your credit score significantly, depending on your personal credit history. An easy way to avoid being late is to set up automatic payments or reminders that help ensure you never miss a payment. Consistent, timely payments demonstrate your reliability as a borrower.
  2. Manage Your Debt Responsibly
    The second most influential factor that impacts your credit score is credit utilization. Credit utilization, also known as utilization ratio, is the amount of credit you use versus the amount you have available to spend. Carrying too much debt on your personal loans, home equity loans, and credit cards shows lenders you are a possible lending risk. It also lowers your credit score. However, if you manage your debt responsibly by making timely payments and decreasing your balances, it shows that you are a trustworthy candidate for extended credit.
  3. Fix Credit Report Errors
    Errors on your credit report are possible, and there are things you can do to address them. Begin by getting your credit report from either of the following major credit reporting agencies: Experian, TransUnion, or Equifax. Then, analyze your credit thoroughly. Look for any discrepancies that could negatively impact your score, such as misspelled names or inaccurate addresses, incorrect account information, or even identity theft. Dispute any errors you find to ensure your credit report accurately reflects your financial history. Making a habit of reviewing your credit regularly will help you identify any errors should they arise.
  4. Long-Term Credit Building
    Improving your credit score begins with having patience—it’s a long-term game. Other steps you can take to build your credit over time are paying down your debt, using secured credit cards to establish credit, keeping old accounts open to show your credit history, and limiting getting new lines of credit that result in “hard inquiries” on your credit. Building to an excellent credit score can take years of financial discipline. But, in the long run, it pays off, especially if you are hoping to improve your credit score for a mortgage.

Pave the Way to a Better Mortgage with Bank of Bozeman!

Increasing your credit score requires dedication and financial discipline. However, by accomplishing these steps, you can improve your creditworthiness, leading you to get a more favorable mortgage rate. A higher credit score not only opens the doors to better mortgage options but also positions you for improved financial stability and opportunities in the future.

With patience and persistence, you can pave the way to your dream home without compromising on a favorable mortgage rate. Let us be your mortgage lending guide! If you’re buying a home in Montana and you’re ready to learn more about what mortgage loan options are available to you, reach out to our home loan experts today. Contact us!