Credit Overview

Credit Score Overview With Top Mortgage Lender In Dallas“Credit is one of the key components when qualifying for a mortgage.” – Captain Obvious. Everyone knows that credit is important and plays a huge role when obtaining a mortgage but here’s what they don’t know:

1. You can Opt Out of Unwanted Credit Solicitations – it’s free and you should do it

2. Lenders Update a Credit Report Before Closing – it’s a must read to prevent any last-minute issues

3. How to Remove Credit Disputes – not applicable to most folks but good info if needed

After you’re done reading the information below and the links above please visit the Do’s and Don’t During the Mortgage Process – you will be held accountable should something happen during the process and one of these items is violated! Everything below is for your information and good information.  

Credit Overview

Credit is extremely specific and so complex that everyone’s situation is unique; therefore, please call us if you would like to discuss your credit in more detail as we’re here to help.

Things You Should Know

Three Scores: You have three credit scores (one from Experian, Equifax, and Transunion) and the mortgage world uses the lowest mid-score of all borrowers for the credit decisions. Example: John and Jane are getting a mortgage and John’s scores are 720, 718, and 698 while Jane’s scores are 710, 702, and 780. In this instance the credit score for the credit determination is Jane’s 710.

Score Ranges: While credit scores technically range from 350 to 850, with 850 being the best, the very vast majority of reports we see will have scores ranging from 550 to 780. An “A+” credit rating is anything 740 or higher. After that every 20 points could impact your loan on certain programs. Example: 720-739 is “A-“, 700-719 is “B+”, etc..

Multiple Credit Checks:: Mortgage inquiries on your credit report don’t hurt your score (99% of the time). Multiple mortgage inquiries, like multiple automobile inquiries, are treated as only one inquiry if made within 45 days of each other and typically don’t hurt your credit. Think about it this way, the credit models don’t want to discourage someone from shopping around and being an informed consumer. So don’t be afraid to have your credit pull by a few mortgage lenders.

Your Report Is Different: A credit report that a consumer pulls will have different scores than a report a mortgage company pulls. The main reason is because the mortgage industry report’s will use a different credit algorithm than that of a generic credit report. This is also true for auto loans. Think about it this way: an auto dealer cares more about your payment history on your past auto loans than any other account.

Don’t Go Shopping: The #1 rule is don’t open any new credit during the loan process until you check with us. Moreover, don’t load up your credit balances either (see Debt Utilization below). We’re not saying you can’t get that new refrigerator, we’re just saying you should check with us first to ensure you don’t jeopardize your interest rate or loan approval.

Inquiries Explained: The mortgage world will require you explain all credit inquiries within the last 120 days to ensure all debts are being used for qualification. This occurs at the beginning of the process AND right before closing to make sure no new credit was opened during the process.

Snapshot In Time: Remember that a credit report is a snapshot in time and is typically 30 to 45 days behind reality. While it’s important to ensure loan application is accurate, we only need to know if there is a significant difference between the current balances and what’s on your report.

The Five Categories of CreditFive Credit Score Categories Best Mortgage Broker Dallas

There are five factors that determine your credit score: payment history, debt utilization, length of credit history, type of credit, and inquiries. Check out each section for the highlights of what you need to know.

Payment History: 35%

To nobody’s surprise, paying your bills on time has the greatest weight of all the categories so pay your bills on-time. The credit scoring system evaluates how many late payments you have had and whether they were 30, 60, or 90 days late, or worse, in default. These systems look at whether the late payments were consecutive. Here are four practical (and obvious) steps that you can implement to improve your credit score:

  1. Make all your payments on time. (Duh!)
  2. Bring delinquent accounts to current as soon as possible.
  3. Pay your bills before they go to a collection agency.
  4. Check your credit report for accuracy on a regular basis and dispute any erroneous information.
Debt Utilization: 30%

Debt Utilization is just a fancy way of saying: how much credit do you have available versus how much do you actually use. Therefore, it is not how much you owe, but how much you owe compared to what you are able to borrow. Keeping your credit balances below 50% is good and below 30% is even better.

A quick trick to increase your credit is to call your credit card companies and try to increase your available credit lines.

Example: If you owe $1,000, and you have $10,000 of credit available to you, you are only using 10% of your available credit line and the credit models love you. On the other hand, if you owe $1,000 and you only have $1,000 available for use, you have “maxed out” your available credit and your credit scores will be very negatively impacted.

Note: the scoring system doesn’t have a memory when it comes to balances. In other words, the credit models don’t care if your card was maxed out last month but paid now; or vice versa. The score is based solely on what’s reported at the time the time of the credit pull.

Length Of Credit History: 15%

The longer your accounts have been opened the more the credit models like you. Newly opened accounts will bring your score down for the first 12 months- but especially in the first 6 months – so don’t go opening any new accounts before (or during) the home buying process. Here are three practical steps for you to improve your score in this area:

  1. If you are going to close your account, close the newest credit cards instead of the oldest ones. Your score will improve over time if you keep accounts open and use them every once in a while. Call us before closing your accounts and we’ll be happy to offer advice on which tradelines you should close.
  2. Think twice before jumping on that latest 0% credit card transfer-offer or opening a new card just to get a 10% discount at a department store. New credit is seen as a sign of distress.  Don’t damage your credit for a random $23 savings at Nordstroms.
  3. If you don’t have much of a credit history, and you are planning on taking out a mortgage in the future, it may be a good idea to establish a few open credit lines with little or no balance on them. Although newly opened accounts tend to lower your score initially, they will improve your score once they’ve been open for a while, somewhat active, and paid off with little or no balance. Again, call us if needed.
Type of Credit: 10%

A good mixture of auto loans, credit cards, and mortgages is always best. Ideally you should have a mortgage, an auto loan, and 3 credit cards. Again, this is “ideally” and a guideline. As stated above, credit is very specific to a person so call us if you have any questions.

Inquiries / New Credit: 10%

Inquiries appear on your credit report for 120 days and are treated differently based on the type of inquiry.

“Soft” inquiries are made by companies that you already have accounts with and these types of inquires do not hurt your credit. For example, a credit card company will do a soft inquiry to view your current credit status and ensure you’re still a worthy credit risk – i.e. they’re looking for an excuse to increase your rate.

A “Hard” inquiry is any inquiry where your credit is pulled for new credit. These include credit cards, automobile, and mortgage companies. Here are three steps you can take to improve your score in this area:

  1. Multiple mortgage and automobile inquiries are treated as only one inquiry if made within 45 days of each other and typically don’t hurt your credit. So it’s better to shop for a car or a mortgage over a two-week period, rather than to prolong it over a longer timeframe.
  2. Don’t apply for a lot of credit or open multiple credit cards at the same time. New credit is seen as a sign of distress.
  3. If you’re thinking of applying for a mortgage within the next 90 days, it would be good to wait until after your home loan closes before you apply for any new credit.

As stated, please call us if you would like to discuss your credit in detail. We’re here to help.

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