Q: How important is my credit when applying for a mortgage?
A: VERY! And here is why.
What is a Credit Report?
According to annualcreditreport.com, it is an organized list of information related to credit activity. What does this mean? Well, the three credit reporting agencies, Experian, Equifax and TransUnion, receive the information from businesses that lend to you. These businesses report things like:
- the date the loan began
- the original amount of the loan
- current balance
- current payment history
This information is reported to one or more of the three credit reporting agencies and is put into an organized list that reflects your borrowing activity.
Where does my score come from?
The information from your credit report is fed into a mathematical formula that analyzes your information and generates a score. This score indicates how likely you are to pay your bills in the future. The mathematical formulas for each of the credit reporting agencies is different, therefore, your scores may be different from one agency to another. However, according to myfico.com, credit scoring information is weighted as follows:
A mortgage lender will request your report and score from each of the credit reporting agencies and will use the middle score of the three scores as the primary score for lending eligibility. For instance, if Experian reports a score of 683, Equifax reports a score of 672 and TransUnion reports a score of 658. The lender would use the middle score of 672 as the primary score for lending eligibility.
What does my credit score have to be to get a mortgage?
FICO (Fair Isaac) scores range between 300 and 850. You’ve probably heard that the goal is to have a high credit score. Yes, the higher the better. Your credit score affects the interest rate that you receive on your mortgage and on conventional mortgages requiring private mortgage insurance (PMI), that rate will be affected as well. Private Mortgage Insurance (PMI) is required when your down payment is less than 20%. The good news is that government loans, such as FHA or USDA/Rural Development, do not increase mortgage insurance premiums based on credit score. What does your credit need to be? Let me answer the question with a number...640. Well, 640 is not the magic number, however, it is a good score for just about every mortgage lending situation. Your mortgage lender and the type of mortgage you select will determine the minimum credit score required. Government loans do not have a minimum credit score threshold, but a lender can set a minimum credit score to reduce the risk for their lending institution. Low down payment conventional loans may have a minimum credit score that is higher than the 640 number that we have mentioned. Again 640 is not the magic score, it is just a benchmark, which generally meets the requirements for most loan programs and answers our credit score question. Lastly, on rare occasions the credit score may not accurately reflect what’s happening on the credit report. Just because you have the right credit score for a loan, it doesn’t mean you will automatically be approved for your mortgage. The lender will still review the entirety of the credit report to determine your eligibility for the mortgage requested.
What if your scores are lower than you want them to be? Don’t worry, read on.
Can I improve or improve my credit score?
Yes!
Here is how. 1.) Pay your bills on time every month. 2.) Do not borrow up to the maximum on your revolving debt (credit cards). For instance, if you have a credit card limit of $2500, do not borrow up to the limit. It is best to borrow less than half of the approved limit and of course, pay on time. 3.) Have established credit, keep balances low and try to limit the number of creditors you have on your credit report. 4.) Payoff debt rather than moving it around.
Now, if your credit score is lower than you like and you want to improve your score, here are some tips:
- Pay down any accounts that are near their maximum borrowing limit.
- Look to see what’s pulling down your score, such as, collections, judgements or charge-offs and resolve them.
- Look for errors on your report, such as, accounts that are not yours or errors in reporting and contact the company reporting the error to request a correction.
If you have a bankruptcy, foreclosure or both, then time limits have been established through underwriting guidelines to determine when you are eligible for a mortgage. Additionally, it is important that when a major financial event, e.g. bankruptcy, foreclosure or judgement happens, you should check your credit report for correct reporting of the event.
Summary
Credit reports and credit scores have many moving parts; however, just like all things in our financial lives, we have to manage our credit versus letting our credit just happen. Here at First Bank and Trust, we understand that you are not a credit score and that there is more to the people we serve than what is on their credit report. Our job is to listen and learn your individual needs and to use our knowledge to serve and support you when you are ready to purchase or refinance your home. Our mortgage loan originators are trained to know credit and credit scores and the entire mortgage process. We’re here to help you when you’re planning to buy a home, build a home or if you need to refinance.
First Bank and Trust, The Bank That Puts You First!
Here are a few links for more in depth information:
To apply or get mortgage information: www.firstbank.com
To get a free copy of your credit report annually: www.annualcreditreport.com
Information about your credit score: www.myfico.com