As you get ready to delve into the mortgage and homeownership process, you have likely come up with a number of questions about what impacts your ability to secure favorable terms for your mortgage — or to be approved for a mortgage at all. One of the main areas a mortgage lender will consider when determining whether you qualify for a mortgage is your credit score.
However, the credit score that you view for yourself and the score that they analyze to determine your lending worthiness are not always the same. In order to present the best case for favorable terms on your loan, it is important to understand which credit scores mortgage lenders will examine during the approval process.
What Are The Different Types Of Credit Scores?
Credit scores are not the same across the board; in fact, three major credit bureaus manage each individual’s credit score, and each bureau conducts the process slightly differently. This results in slightly variable credit scores among the three. Experian, TransUnion and Equifax are the three bureaus in charge of managing credit scores, and each one will keep a score for you, regardless of whether you have previously conducted any business directly with them.
In addition to each bureau’s individual ways of calculating a credit score, FICO (from an abbreviation of Fair, Isaac and Company) has created specific models through which each bureau does its credit scoring. When mortgage lenders pull your credit score, they are not just looking at one bureau’s report; they will evaluate all three.
Which Credit Scores Are Mortgage Lenders Primarily Interested In?
TransUnion, Equifax and Experian will each provide a credit score for the lender when they are determining your chances of loan approval. The three scores they will look at specifically are the FICO® Score 2 (sometimes called the Experian/Fair Isaac Risk Model v2), the FICO® Score 5 (known as the Equifax Beacon 5) and the FICO® Score 4, or TransUnion’s FICO® Risk Score 04.
Each of these scores can range, typically within less than about 80 points of each other, and most mortgage lenders will take the middle score as your assigned credit score. This may change slightly if you are applying jointly with someone else, in which case they will often evaluate all scores involved and choose the lower of the middling ones.
If you are trying to improve your chances of being approved for a mortgage loan, try to keep your credit score at a minimum of 580 in this middle range. Carrying a credit score lower than this could dramatically impact how favorable your mortgage terms are (such as only qualifying you for a high interest rate) or may prevent you from qualifying for a loan at all. The higher your score, the more favorable a loan may be. Scores of at least 700 are considered to be very good, and a score of 800 or above is exceptional.
Small Changes That Can Impact Your Credit Score
If you would like to improve your credit score before applying for a mortgage, or if you are planning on making certain purchases during the process of acquiring a home, there are a few things to know. Paying off credit cards on time, not missing payments on debts and not utilizing a significant portion of your credit are powerful ways to boost your credit.
One of the most detrimental things an individual can do during the home buying process is to begin purchasing furniture and other items on a credit card in preparation for moving in. This will increase your debt to income ratio, which can negatively impact not only your credit score but also your overall financial picture evaluated by lenders.
It is not uncommon for inexperienced buyers to be preapproved, begin putting home-related purchases on a credit card, and then find themselves denied during the later parts of the purchase process due to the credit and financial solvency evaluations that ensue.
Talk To The Mortgage Pros For Guidance During The Loan Process
If you are trying to secure a favorable home loan for your real estate purchase and are concerned about your credit or would like to learn more about your options given your current creditworthiness, be sure to talk with a real estate and mortgage financing expert.
The professionals at Fairfax Mortgage Investments would be happy to help you achieve advantageous terms on your mortgage and prepare you for the process of closing on a home. Reach out to schedule an appointment to discuss your situation and develop a strategy to put you in the best position possible for this important financial decision.