Many homebuyers don’t know that they have more than one credit score. They also do not realize that the score may be lower than they expected. If you find out your mortgage score is lower than you expected, it could affect what program you can use and what interest rate you may get.
Many banks, credit cards and other financial providers will show you a free credit score if you are using their services. There are also credit monitoring applications that can show free credit scores. These are more educational than an actual mortgage credit score. Mortgage scores are based on a credit scoring model that is usually tougher than other scoring models. Auto lenders usually use a credit score that predicts how likely you are to default on a car loan. Mortgage lenders pull FICO scores from the three major credit bureaus – Equifax, Trans Union and Experian. Then of the three scores, we use the middle score. Mortgage lenders use a tougher model since they need to be sure borrowers are going to pay back their mortgage. Frequently that mortgage score is going to be lower than the score you get from your credit card or credit monitoring score.
How does your credit score affect your mortgage eligibility? Your credit score can determine the following:
- What loan options you can qualify for
- Your mortgage interest rate
- Your loan amount and home price range
- Your monthly payment throughout the life of your loan
For example, an excellent credit score versus a poor score could easily save you money with your interest rate. If your score is lower, it may mean your interest rate is higher and could easily cost you $100-200/month depending on the mortgage amount and interest rate.
What can you do to increase your credit score? The most important thing is to make sure your payments are all on time. You also want to make sure your credit card limits are less than 30% of the available credit. This means if your credit card limit is $1000, you want to keep the balance under $300. If you have credit cards that you are thinking about closing, please remember that the older credit cards help your score -if you have a card for 10+ years, it may not be a card you want to close as you lost that 10+ year history.
Why does your credit score matter? There are several things that your credit score affects. Here are some examples:
- Your credit score can affect the type of loans you can get
- Your score can affect your interest rate
- Insurance companies use credit scores to set your insurance premiums
- Credit scores can affect your credit card interest rates
- Landlords use credit scores to decide if you can rent their apartments
- Cell phone companies may require a deposit if your credit score is too low
Since your credit score can affect areas other than just mortgages, it is important to keep your score as high as you can. If you can check your score and watch it, it can help you. If I have clients trying to increase their score, I have them check their score on programs like Credit Karma or a credit card they currently hold. Then if you are paying down debt, you can see what the score does and how much it changes. That gives me a better idea before I pull a new report. It may not change as much as you expect, but it does give us an idea. Plus you can watch to see when the new balance reports or if a tradeline goes away. Knowing your credit score will help you when you are ready to apply for a home loan.
Leslie Vanderwerf, NMLS ID#335509, Cross Country Mortgage LLC, An Equal Housing Lender, NMLS#3029 – Email – Website