It is important to have a general understanding of how credit scores work and affect your mortgage application. Known as FICO scores, credit scores make interpreting credit reports less subjective, and underwriting decisions more uniform. They determine your mortgage eligible and pricing tier. Generally speaking, the higher the credit score, the lower the interest rate. Scores range from 300 to 850.
When your loan officer pulls your credit report, you will receive scores from each of the main repositories, TransUnion, Equifax, and Experian. Regardless of loan type, most investors require a minimum, median credit score of 620.
Although there are over 40 factor codes that determine a credit score, five main categories have the most influence:
Making payments on time has the greatest positive impact on a credit score. The more time that elapses after a late payment, the lower the impact on the credit score.
Having credit and not using it can lower a credit score. Lenders look for three to five revolving credit cards open for at least 24 months. It is a good idea to use and pay them off monthly, or keep a very low balance.
Maintaining a small balance on older accounts is a good practice. These accounts are the most valuable and should be used about a month before pulling a credit score.
Avoid applying for credit with finance companies as they have a negative impact on credit scores. Based on the predictability analysis of millions of sample files, studies show that people who use finance companies are more likely to have 90-day late payments than any other type of credit accounts such as mortgages, cars, revolving, or installment accounts. Always make it a priority to make all your payments on time, especially mortgages, cars, and student loans.
Pulling a credit report impacts a credit score. Too many inquiries can make the difference between approval and denial. Only open new accounts when necessary. When a loan is in-process, only allow your loan officer to pull your credit until your loan closes. While most insurance companies require a credit check before extending coverage, it is considered ‘soft pull,’ and will not affect your credit score. Mortgage companies are required to re-pull your credit within 48 hours of closing. All debts must be similar to the time of application, or loan approval can be revoked. Any new inquiries must be addressed.
Helpful Hints for Better Credit Scores
Facts About Your Credit
Whether you are considering buying a new home, refinancing your current home or planning for the future, the first step is to check and review your credit with an expert which will allow you to troubleshoot potential problems.