mortgage and loan application
mortgage and loan application

Does Your Credit Score Affect Mortgage and Loan Applications (and Vice Versa)?

Owning a home is a dream for most Filipinos, but it comes with a hefty price. Getting one can be pricey, and only very few people have the cash to pay the full amount upfront. To make this dream a reality, most people turn to home loans. These loans are lifelines for those with good credit, but how does credit affect mortgages?

In this article, we will explain the relationship between credit scores and mortgages, things to consider before applying for one, and how alternative credit scoring can help you in the process.

How Does a Home Loan Affect Credit Score and Vice Versa?

The health of your credit score is directly related to your chances of securing a mortgage. A home loan can also have a significant impact on your credit score. Here’s how the two are related:

  • Credit Score Requirements:

Lenders will look closely at your credit history when deciding whether to grant you a mortgage. The minimum credit score needed to qualify for a loan varies between institutions. When applying for a mortgage, a higher credit score increases the likelihood of being approved for better terms, such as a lower interest rate.

  • Applying for a Home Loan

How does credit affect mortgages? Home loan providers routinely pull credit reports and scores to determine whether or not they will extend financing. The odds of being approved are higher if you have a high credit score and a solid credit history. However, if the lender discovers any negative information on your report or finds you have a low credit score, it may reject your loan application.

multiple credit cards

  • Getting Multiple Loans

Does applying for multiple loans affect your credit score? The answer is yes. Applying for multiple loans within a condensed timeframe can potentially harm your credit score. It’s crucial to be mindful of this, as it can adversely affect your overall financial health.

  • Payment History

Your payment history heavily influences your credit score. Maintaining a good credit rating can be as simple as paying your mortgage on time each month. However, your credit score can take a hit if you have a pattern of missing or being late on payments.

  • Credit Utilization:

Home loans can increase your overall debt load, which affects your credit utilization ratio. If you have high outstanding balances on other credit accounts relative to your credit limits, taking out a home loan could increase your credit utilization and potentially lower your credit score. Generally, it’s recommended to keep this ratio below 30% to maintain a good credit score. A home loan can increase overall credit utilization, temporarily impacting your score.

credit score

  • Credit Mix

Credit scoring systems consider the types of credit accounts you have. Your credit score can benefit from having a wide variety of credit accounts, especially long-term installment loans like a mortgage. This demonstrates your maturity in handling various forms of credit.

  • Length of Credit History

Mortgages are commonly extended across multiple years, providing borrowers with a means to finance their homes for an extended period. Your credit score may benefit from getting a loan application because it will increase the average age of your credit accounts. Maintaining consistent on-time payments will enhance your credit history, improving your financial standing.

What to Consider Before Applying for a Mortgage

The decision to apply for a mortgage is a major one financially, and there are many things to think about before taking the plunge. Here are the top three tips for loan applications you must ponder before applying for a mortgage:

Build Your Credit Score

Bad credit affects mortgages, so it’s best to build your credit score first before deciding to apply for any home loans. A good credit history can be established by doing the following:

  • Pay your bills on time, including rent, credit cards, and auto loans.
  • Limit your credit card spending to 30% of your available credit limit.
  • Reduce your high credit card balances and look into balance transfers to get your credit back in good standing.
  • Examine your credit report for inaccuracies and take steps to correct them if you find any.
  • Conduct mortgage rate shopping within a 30-day timeframe to ensure optimal results. Numerous inquiries scattered over a prolonged period can potentially diminish your overall score.
  • Build your credit history by consulting a credit counselor or a financial institution.
settled debt

Settle Any Incurred Debts

You may have a harder time getting approved for a mortgage if you have a lot of debt from things like credit cards, car loans, or student loans. Instead of saving for a down payment, focus on this bad spending habit and pay off your debt and past-due bills first. Reduce your overall debt first, as this has a positive effect on your credit score, and then focus on paying off any high-interest debts.

Reduce Debt-to-Income Ratio

Lenders prioritize borrowers who can demonstrate both a steady source of monthly income and the ability to make their mortgage payments on time every month. The debt-to-income (DTI) ratio is an important consideration for loan risk specialists. A person’s or family’s DTI is the proportion of their monthly gross income that goes toward paying down debt, expressed as a percentage. The majority of major Philippine banks require home loan borrowers to maintain a DTI ratio of 30% or lower. This criterion ensures financial stability and aligns with industry standards. Besides home loans, DTI ratios also affect your credit score. So, if your DTA ratio is high, consider lowering it first to improve your credit score and increase your chances for mortgage approvals.

alternative credit score

How Alternative Credit Scoring Can Make Loans More Accessible

We understand that applying for home loans requires financial stability. Often, loan applications get rejected because of the borrowers’ credit history. But with alternative credit scoring, loan applications are now more accessible, even to the underbanked.

Finscore and CCMobile are pioneers in this field. A leading fintech company and credit score provider, Finscore opens opportunities for the unbanked and underbanked to apply for credit using alternative data. These data include telco data, shopping history, rental payments, and social media behavior. By partnering with CCMobile, fintech companies like Finscore can make loan applications accessible to all. This enables broader access to credit while reducing financial risk for lenders.

Curious to see how you can get better home loans using alternative credit scoring systems? Check your telco credit score here.

approved mortgage application form

Credit Scores and Mortgage Loans Go Hand in Hand

Truth be told, credit scores and any loan types are connected. A good credit score can make it easier to get a home loan at reasonable rates, and responsible loan management can have a similar effect. On the flip side, improper management of your home loan or a low credit score can create obstacles to obtaining a mortgage or lead to increased expenses.

So, don’t let bad credit affect your home loan applications and vice versa. Consider the tips we’ve mentioned here before you consider applying for one. If you have any questions, feel free to contact us, and one of our experts will assist you.

FinScore is a financial technology company in the Philippines that offers a powerful credit scoring platform and fraud detection tools based on alternative data, including telco-based data. 

As the pioneer in lending and scoring of the unbanked, we continuously provide fintech services that empower financial institutions, banks, and credit bureaus with flexible platforms to help them make insightful and reliable credit decisions. Contact us today to learn more about our products and solutions for financial institutions.