Mortgage Credit Score: How Important Is It?
A credit score obtained by a mortgage company will usually be a little different than scores pulled from a free credit report service or from some other type of business. This is important since your score determines the interest rate and the approval.
You can get an idea of your scores from other sources for other reasons but until a mortgage company pulls your credit, you will not know for certain. And small differences can make a huge difference when it comes to mortgage approvals and rates.
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Why Are Credit Scores Different?
A mortgage credit score may be different than one for a car loan or some other credit pull. The 3 credit repositories are TransUnion, Equifax, and Experian. They each calculate a score.
If a mortgage company pulls your credit, more importance will be placed on your mortgage payment history (if you have history) to calculate a credit score. Conversely, if a car company pulls your credit, more importance will be put on your car payment history…etc. If a free credit report service is used, they could be different too.
A car company usually only uses one score. They pull from only one repository like Experian for example. For a mortgage, all 3 repositories must be included. It is called a tri bureau merge. Each repository calculates a credit score and also reports all balances, monthly payments, and payment history. The monthly payments are used to calculate your mortgage debt to income ratio.
Our clients were not happy to say the least when they found out our credit report had lower scores than those they obtained from another source like a free pull.
But they are not always lower. You may find they were higher than you thought or there was no difference. Just be aware there is a possibility they could be different.
There can be incorrect information reported by one or more repositories. If you paid a loan off in full but for some reason it did not get reported to a repository, it will show up on your credit report. When that happens, you have to show the underwriter your loan is paid in full with documentation from the creditor. It is too late at this point to get the repository to change their report so producing the paid in full statement is the easiest way to satisfy the underwriter. You should still send it to the reporting agency and get it removed for the next time.
I saw the recent 60 Minutes report talking about mistakes on people’s credit reports and having seen hundreds of credit reports myself, there is a strong possibility you will have a mistake on yours. In addition to giving documentation to underwriting, you should get that to the credit repositories also and have them remove the incorrect information.
FICO Score
My lender always says FICO score when talking about my mortgage…what is that?
The word FICO score is used all the time in the mortgage industry. There is an actual credit score named the FICO score but in the mortgage world, it just means your middle score. The automated underwriting computer takes into account all 3 of your scores when making a decision for approval.
However for pricing and rates, it is always your middle score which is called in the industry a FICO score.
If your credit scores are 747, 751, and 722, your FICO (middle score) is 747. 747 would be the number your loan officer would use when talking with you and it’s also used to price your mortgage.
If there are 2 borrowers, the lowest middle score out of the 2 is used. If your credit scores are 718, 723, 736 but your co-borrowers’ scores are 651, 663, 682, unfortunately the spouse's middle score will be used for pricing because it is the lowest of the 2.
Your middle score is 723 but your co borrower’s is 663 and is the lowest of the two, so 663 is the FICO score used for pricing.
There has always been add ons to your mortgage rate depending on the risk. An add on is also known as a hit or adjustment.
But since the mess, there are even more. That is why your credit score is so important. One point difference can mean you pay a higher rate or higher costs. Your middle score or FICO score is used along with your equity position or loan to value to determine the add on.
For example on a refinance mortgage with 20% equity and a 720 FICO score, there would be a .250% add on. You can pay that upfront along with your closing costs or you can increase the rate to pay it. However, if you still had 20% equity but your FICO score was 640, your add on would be 3.00%! If you paid that at closing it would be more than almost all of your other closing costs and if you used the rate to pay it you would have to increase it more than a full point to cover the add on.
What is the Minimum Score I Need to Get a Mortgage?
If your mortgage credit score is on the low side, you have 2 hurdles. One is the expense of a low score and the other is getting through underwriting with an approval. 620 is the minimum credit score for Fannie Mae and FHA/VA. However, some lenders may be more stringent with the minimum scores and require higher than 620. And depending on the risk of the mortgage the minimum may be higher.
How do you get a better score?
To get a better credit score, try these tips. First, have at least 3 open accounts with a balance. That could be a mortgage and 2 credit cards or if you do not have a mortgage, a car loan and 2 credit cards.
Credit repositories like accounts for mortgages and car loans because they have a repayment term. They are called installment loans. They like credit cards less because there is no ending.
You need 3 open accounts but try not to go much past that. Your credit score goes down when you have too many open accounts. For your credit cards, try to keep the balance from going past 50% of your credit limit. Your score goes down when your balances are too high. Also, pay more than your minimum payment. And most importantly, do not pay late.
You can go and get a free report and at least it will give you an idea what you are working with.
740 or more is an excellent credit score
700-740 is a good credit score
660-700 is a fair credit score
620-660 is a poor credit score
Good Luck!
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Author: Terri Ewing
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