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Everything About Your Credit Score and Mortgage

By Veronica Nguyen · Dec 9, 2014 · Mortgage

Everything About Your Credit Score and Mortgage

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All you need to know about your credit score and how it affects your ability to get approved for a mortgage. Learn how mortgage lenders use your credit report and score.

Unless you plan on paying cash for your home your credit score matters. The difference between good and bad credit will ultimately determine if you can qualify for a mortgage loan, and if so, it will determine how good of a deal you can get.

What Does a Credit Report Say About You?

A credit report is a detailed summary of your credit history. The information inside your credit report is used to determine your credit worthiness and contains the following information.

Repayment History

Informs the lenders whether you make your payments on time. If you've been late it will show how long you've been late and for how much.

Public Records

Provides a complete summary of your public information. This data may include records such as liens, judgments and bankruptcies.

Personal Information

Provides a complete history of your personal information. Includes your name, aliases, social security number, date of birth, address history and more.

Credit Accounts

Shows the lender every credit account you have. Details the total number of open and closed accounts, how much you owe, what your credit limit is and what your last reported balance is.

Credit Inquiries

Tells the lender how many times you've tried to apply for credit and from whom. Credit inquiries are typically from lenders, landlords, car dealers and credit card companies.

One of the easiest ways to identify what's inside your credit report is to order your annual credit report which is available free to you once every 12 months.

A Credit Report is NOT a Credit Score

A credit report contains information about your credit, while a credit score is a numerical representation of your credit report. In other words, your credit score is a grade of your credit history.

The Fair Isaac Corporation, also known as FICO, is the oldest and most trusted credit score model used by about 90% of all mortgage lenders. While you can get your credit report for free, you will have to pay a small fee to get your FICO score.

Your FICO Score Differs Between Credit Bureaus

There are three primary credit bureaus Experian, Equifax and Transunion. Each credit bureau gathers data about you in different ways and therefore they have different credit report data on you.

Therefore, when the FICO score model is applied this almost always results in a different FICO score between each of the credit bureaus due to differing credit report data.

What Minimum FICO Score Do You Need to Qualify for a Mortgage?

A 620 FICO is the minimum credit score required to qualify for most mortgage loans at a reasonable interest rate.

There are a select few lenders who will go as low as 500, and some won't even look at your credit score, but beware that you'll pay for it through significantly higher fees, higher interest rates and unfavorable loan terms.

Chances of Getting Approved for a Mortgage Based on Your FICO Score

Profile FICO Chances of Getting Approved for Mortgage
Poor 300-579 If you're at the upper end of this range you have a very small chance of getting a loan, and if you do it'll be very expensive. If you're on the lower end of this range getting a loan will be nearly impossible unless you go with a hard money lender.
Low 580-619 Low credit means you're a risky borrower to lenders and it'll be difficult to get a loan. Theoretically, FHA will insure loans as low as 580 and even 500 with at least 10% down, but in reality most lenders have an overlay and aren't willing to go this low and require a minimum of 620.
Fair 620-679 The good news is that with a score of at least 620 you have a good chance to get a loan, but it'll likely be FHA. Be aware that some lenders may require a higher score. Expect greater scrutiny, higher rates and a higher down payment (or loan-to-value) requirements if you're refinancing.
Good 680-749 You're doing a good job! This range of score will help you qualify for most loans, and if you're above 720 you'll see even more loan options and won't be hit with any negative rate adjustments.
Excellent 750+ Your score is well above the national average of 691 and at this high level you'll get some of the best rates possible from lenders.

Mortgage Lenders Use Your Middle Credit Score

When applying for a mortgage your lender will pull what's called a tri-merge credit report, which is one report that contains credit report data from all three major credit bureaus Experian, Equifax and Transunion. There will also be three different FICO scores from each bureau.

Your lender will use the middle score of the three available to approve your loan application.

In the case that you only have two credit scores the lender will use the bottom score. And if you have only one credit score most lenders will not be able to approve you for a loan due to a lack of credit history.

Comparing Your Credit Score to Others

According to Statistic Brain, the national average FICO score is 691. Wisconsin and Hawaii have the highest average score, while Mississippi has the lowest average score.

Mortgage Lenders Use a Specific FICO Score You Can't Access

By now you will note that the FICO score is used by the majority of all lenders to determine whether you'll qualify for a home loan.

But not all FICO scores are the same! There are more than 49 different credit score models used for different purposes, from automobile loans to mortgage lending. But unfortunately consumers are not offered access to the FICO score that mortgage lenders use to approve your loan.

Alternative to FICO: Vantage Score

Aside from the most popular FICO score model, the big three credit bureaus have collectively created what's known as the Vantage Score.

The Vantage Score is used by approximately 10% of lenders, landlords, cell phone companies and utility companies. A Vantage Score, similar to FICO, ranges from 300 to 850. But unlike a FICO score, the Vantage Score ignores paid collections and accounts negatively impacted by natural disasters.

If you use popular free services such as credit.com and Credit Karma you should be aware that the credit score you are getting is the Vantage Score, and not the FICO score. This is not to say it isn't good information. Just understand that your mortgage lender will be using a different number when approving you for a loan.

Don't Focus on Your Credit Score So Much as Your Financial Habits

Although we talk a lot about your credit score, that really isn't where you want to focus every day. Your credit score is a reflection of your credit report, which in turn is a reflection of your financial habits.

Therefore, it's more important to create a smart financial routine of managing your money. In order to improve your credit score you will need to improve your credit report, and that requires time, patience and dedication.

What other information or tips can you offer? Please share in the comments.


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