Knowing your credit score before applying for a loan can be helpful and understanding how lenders evaluate credit can also be informative. When you know these things, you will have a better understanding of what you need to do to qualify for a loan or to qualify for a better loan, and here are three good ways to evaluate your credit before you apply for a mortgage loan.
Look at your credit utilization rate
An important part of your credit is a ratio that is called credit utilization rate. This rate measures how much of your credit you are using. For example, if you have a credit card with a $10,000 credit line and you owe $2,000 on the card, your credit utilization rate would be 20%. Creditors prefer seeing really low credit utilization rates rather than high ones. While 20% is not exactly high, it would be better if your rate was lower. You could improve your credit rating by paying down your balances on your credit cards, as this would lower your credit utilization rate.
Examine your debt-to-income ratio
A second good way to evaluate your credit is by examining your debt-to-income (DTI) rate. This is another ratio, and this ratio measures the amount of money you owe on debt compared to your income. Lenders also prefer seeing low DTI rates when reviewing applications, because it means that less of your income is promised away each month, and this means that you have more of your income in your pocket.
Find out what your credit score is
The other good step to take is to find out your score. Your current credit score will tell your creditors a lot about the way you manage your finances. When you have a great credit score, it will appear a lot more favorable to lenders when you apply for a mortgage. If you look up your score and find that it is low, you should see if you can find ways to improve it before applying for a loan. If you are not sure what a good credit score is, ask your lender what types of scores they are looking for.
While there are a lot of different loan programs out there, you will likely qualify for a better interest rate and loan if you have great credit. To learn more about qualifying for a mortgage loan, talk to services such as Sharefax Credit Union.
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