Credit is extremely specific and very complex. This credit overview is to provide a better understanding of how credit works when getting a home loan.
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..
Credit Pulls: 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.
“Credit is one of the key components when qualifying for a mortgage.” – Captain Obvious.
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.