The credit score you see and the score a mortgage lender sees won’t be the same. They may be quite different. If your mortgage score is much lower than you thought, it could mean higher rates and closing costs. Why such a difference and what can you do?
What are Free Credit Scores?
Your bank and credit card companies may offer you free credit score access. Each month you can log in and see your updated score. This score is a ‘generic’ score. It’s for educational purposes and not meant to determine your ability to secure a loan.
The free credit scores are to help consumers know where they stand. You can use it as a guide to fix your credit before you apply for a mortgage, but mortgage lenders look at your FICO score. This is NOT the credit score your banks or credit card companies offered.
Mortgage lenders have a more specific credit scoring model because of the size of the loans they offer. For example, there’s a big difference between a $10,000 personal loan and a $500,000 mortgage.
Most free credit scores don’t offer the same information. It’s a good baseline to let you know if you’re in the ballpark for mortgage approval or low rates, but you want to know your FICO score if you’re in the market for a mortgage.
If you want access to scores closest to what mortgage lenders see, check out MyFico.com or Experian.com. They won’t be an exact match, but they are closer than the free scores.
What are Mortgage Credit Scores?
Mortgage credit scores go through your credit with a fine-toothed comb. Lenders need to know that you’re a good risk and that you won’t default on your mortgage.
Mortgage credit scores consider:
- Payment history – This has the largest impact on your credit score. Even one 30-day late payment can bring your mortgage score down a lot.
- Percentage of used credit – This also has a large impact on your mortgage score. The higher your credit card balance, the higher your percentage of credit used which lowers your credit score.
- Age of credit – How long you’ve had credit also affects your credit score. The older your accounts are, the more information lenders have to see your payment patterns. Younger accounts may count against you.
- Total debt balance – The more total debt you have, the more it hurts your mortgage score. Lenders want borrowers with minimal debts to decrease the default risk.
- Recent credit patterns – If you recently opened new accounts, it could count against you. Lenders want borrowers who are financially secure and don’t need outstanding loans to get by.
Why Credit Scores Matter
Your credit score and credit report is a summary of your borrowing history. It tells lenders the type of borrower you are – whether you pay your bills on time or you default. Lenders can also tell if you borrow excessive amounts or even if you miss on repayment.
The credit score gives lenders a snapshot of your credit history right now. A high credit score means you have a good credit history and a low one means you’ve had trouble.
It won’t be the only factor lenders use, but it’s one of the major factors. If you don’t start with a good credit score, the loan only gets harder and more expensive to get.
How Credit Scores Affect your Mortgage
When you apply for a mortgage, lenders look at your credit score first. They use it to determine which loan program you’d qualify for, such as FHA, conventional, or USDA.
Once they determine which loan program you fall into, your credit score determines the loan term, loan amount, and interest rate.
Lenders use your credit history to determine your risk too. If you have a history of late payments or defaulting on debt, they may decline your application or charge higher rates/fees. If you have a solid credit history, you may get the best terms and lowest rates.
Lenders use your credit score throughout the process, and in the end, it determines the total cost of your loan. The higher your credit score is, the less you’ll pay over the loan’s lifetime. A low score means a more expensive mortgage.
Preparing your Credit for a Mortgage
When you decide you’re ready to buy a home, look at your credit first. Pull your free credit reports and go through them. Everyone gets free access once a year, but until April 2021, everyone gets free weekly access.
- Late payments – Bring them current
- Debts exceeding 30 percent of your credit line – Pay your balance down as quickly as possible
- Public records or collections – Satisfy the debts as soon as you can
- Excessive inquiries – Don’t apply for new credit in the months leading up to the mortgage
What’s the Right Credit Score?
Every lender and loan program has different credit score guidelines. Perfect credit isn’t necessary, but rock bottom credit isn’t good either.
Falling somewhere between the two is ideal. Showing lenders you pay your bills on time and use your credit responsibly helps you get the loan you need. Even if you had blemishes in the past, they don’t hurt your credit score forever.
The key is to show lenders you can handle your debts now and that you’ve turned over a new leaf if you had some credit trouble.
Ideally, lenders want credit scores near the 700 range, but loan programs, like the FHA loan, allow scores as low as 580.
Get your credit score as high as you can long before you apply for a mortgage. Keep an eye on your credit history, dispute any errors, and fix any mistakes you make quickly. Your efforts will pay off with low interest rates and the best mortgage terms.
The real estate market in both Colorado Springs and Pueblo is very competitive and having your credit in line will ensure you maintain a competitive edge.
Connect with me today so we can position you to get into the home of your dreams!
Additional reading: http://thekevinbaird.com/buyer-and-seller-closing-costs