How Your Credit Score Affects Your Mortgage – Advice from a Mortgage Company
Do you know what your credit score is? Or why it’s important? Many first-time homebuyers ask a mortgage company questions such as: How will my credit score affect my loan rates? Does my spouse’s low score impact my loan numbers? Will applying for pre-approval hurt my score? Here’s what you need to know about how your credit score affects your mortgage. How much house can you afford?If you have a high credit score, your mortgage company will reward you with favorable rates. Lenders use your credit score – determined by your borrowing history – to evaluate your ability to pay back your loans on time. Show a higher credit score, and you can get better rates, leading to serious savings over your mortgage’s term. You should know that each of the three major credit bureaus (Transunion, Experian, Equifax) calculates the credit score they award you using slightly different algorithms. Plus, each of those bureaus has many variations of your scores. While all these factors make understanding your credit score a bit puzzling, the bottom line is that the same few basic factors determine all your credit scores. That’s why you don’t worry about a single version of your score or just one bureau’s numbers. Your mortgage company’s basic pre-approval process should include a soft credit check. By knowing your credit score, your lender can calculate your loan more accurately. You can apply online using a 3-minute basic pre-approval form. Typically, prospective lenders enter their social security numbers into the secure site, and the mortgage company runs a “soft” credit check. It doesn’t affect your credit score at all, by the way. Benefits of a basic pre-approval and soft credit check:
- No influence on your credit score
- You see the score exactly like your mortgage company does
- The lender gets a precise calcuation of monthly debt
- The mortgage company can quickly and accurately calculate the amount you can borrow
- It’s easy to run through different financing opportunities by phone.
A basic pre-approval is a big help when you need a rough estimate of the amount your lender could approve you to borrow. Pre-approval is a great first step for home buyers who are just now wading into the buying process.
Get pre-approved and get your credit scoreAfter the basic pre-approval comes the verified pre-approval, which requires a hard credit check. Once you’ve found the perfect house for you and plan to make an offer (especially in a competitive market), go ahead and get your verified pre-approval letter. This letter is more comprehensive than the basic letter you got, and it will show the exact amount the mortgage company can lend you. To determine your pre-approved amount, the lender’s underwriting team will comb through your financial documents, including your W2s, paystubs, and tax returns. With this information, the team can give you a hard-and-fast number that you can take to the seller, increasing their confidence in your ability to acquire the needed loan. Your mortgage company will use your median score from Transunion, Experian, and Equifax to process a “hard” credit check, which lets the credit bureaus know you are planning to open a new line of credit. The verified pre-approval process impacts your credit score but only slightly – typically less than five points. Benefits of the verified pre-approval and hard credit check:
- You find out the exact amount you qualify to borrow
- In a competitive market, you can compete with buyers who have cash in hand
- Speeds up the underwriting and closing processes
- Has minimal impact on your credit score
How do multiple credit checks work?Basically, switching to Get A Rate within a 30 day period of another lender checking your credit won’t affect your ratings. During the formal underwriting process, however, all lenders must do another hard credit check before closing your loan. It’s a good idea to get the basic pre-approval letter, which has no impact on your score, and wait until you’re ready to start making offers to get your verified pre-approval. But if you need another hard credit check outside the 30-day window, don’t sweat it. The ding your credit score takes is hardly noticeable. How to improve your credit scoreMost mortgage companies offer loans to customers who have a credit score of 620 or above, provided that other contributing factors such as debt-to-income ratio prove satisfactory. But what are your options if you have a lower credit score? First consider how flexible your timeline is. Can you wait, try to raise your score, and then apply when you qualify for better rates? Then again, if rates are low and your credit score stands at 720 or above, you may want to take advantage of low rates instead of working to raise your score – by which time rates may have shot up. It’s a good idea to use an online rate tool to see how improving your credit score could impact the price of your mortgage, and from that, determine your buying timeline. Ways you can improve your creditIf your credit score is not what you want it to be, you have an opportunity to raise it.
- Monitor your credit score. If you see an error, report it. For more information on how to get one free copy of your credit score from each of the bureaus and how to dispute errors, contact the Federal Trade Commission.
- Pay what you owe on time. This is the best way to get and maintain a good credit score.
- Use credit sparingly, especially credit cards. Try to keep your credit card use below 30% or else increase the credit limit on your cards. If you need to use credit cards for more than 30% of your purchases, pay down the balance as quickly as possible.
- Keep your oldest accounts open because a longer credit history is better for your score.
- Limit new credit lines. They can impact your score for 12-18 months.
- Keep a low credit profile once you’ve applied for a mortgage. Don’t apply for any other loans or even check your score. Just sit tight until that loan comes through and you can make an offer on your new digs.
We’re here to answer your questions and help you explore the best possible financing options for you given your situation. Get started by getting our 3-minute basic pre-approval and scheduling a call with one of our Loan Consultants, who can talk to you about your options.
To get a personalized rate quote in under a minute click here.
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It's the height of the home buying season and if you're thinking of buying a home - Stop. Michael Sema ...Tools