What to Know About Your Credit Score Before You Buy
Three important, yet very complex, numbers create your credit score. This score factors heavily into your ability to qualify for a mortgage and will ultimately play a big role in the loan terms you are offered.
While the entire loan application process takes in other considerations such as assets and income, establishing your credit score with your lender is the first step. There are some cases where buyers can qualify without a credit score, but the large majority of buyers will utilize their credit score to qualify for a loan, highlighting the importance for potential homebuyers to understand their score and the measures available to increase it.
Consumer Credit Report vs. Lender Credit Report
Do you know your credit score?
With so many people taking advantage of websites supplying free credit scores, consumers believe they are fairly well versed in their exact credit score. In reality, the majority of borrowers are surprised to find that the lender calculates a different score.
Why the discrepancy?
What most people don’t know is that the number they get from online sites is actually their Consumer Credit Score. This is especially true of free online credit reports where the number calculated is a generic “educational” score that is to be used as more of an overview. Part of this is due to having gaps in information.
Additionally, consumer credit reports don’t consider all of the factors related specifically to homeownership, which takes into account key variables related to your ability to pay a mortgage. To account for different loan types, FICO factors 49 different credit scores, weighting factors differently based on the type of loan you are applying for. Auto lenders, mortgage lenders and personal credit lenders will all be given different scores that best reflect variables specific to them. Learn what goes into your FICO Score (link to What Goes into Your FICO score article).
While a general credit score works well as a guideline, only a lender will be able to tell your score relative to a mortgage application.
Improving your Credit Score
Some actions that hurt your credit score often times seem counter intuitive. For example, many consumers find that paying off a creditor actually hurts their credit score. This happens because any entry on your credit report from a collector has a negative impact, regardless if it states that you settled, paid or owe outstanding debts.
If you are currently working to improve your credit score, consult with a professional prior to paying off any creditors or reducing large amounts of debt. A quality mortgage professional can help you draft and submit a paperwork instructing the creditor to delete the debt without impacting you score after payment. In fact, in most cases your score will improve!
Other actions such as applying for multiple credit card accounts within a short time, moving debt around, or even closing unused credit cards also negatively impacts your credit score.
The complex nature of the credit score leaves many consumers frustrated. The good news is that there are several ways to improve your score. The first is to correct any errors on your report. Others include reducing high balances on credit cards and paying bills on time. For a more in depth guide, check out our Do’s and Don’ts for improving your credit score (links to current articles).
The timeframe to seeing improvements in your score can vary. Some actions, such as removing errors on your report, increase your score in 2-3 days. Others eventually improve your score over time, such as developing a payment plan, or reducing balances on cards.
What Type of Score Do I Need?
As a general rule, a higher credit score gives you better ability to receive a lower interest rate.
A 740 score usually qualifies you for the lowest possible interest rate and best overall loan terms. Borrowers with scores below 620 will have a much harder time qualifying for a loan with an ideal interest rate. A score below 590 seriously jeopardizes your ability to qualify for a mortgage.
Each institution has different regulations around their ability to loan to lower credit scores. Avoid places that make promises that they can get you approved no matter your score. When you consider accepting a loan offer, make sure the institution you are working with built their business on a foundation of integrity and doesn’t operate under shady business practices.
Why is it Important to Improve Your Credit Score?
You want to save as much money as possible. And your interest rate, determined primarily by your credit score, directly affects your bottom line. A 0.5% difference on your interest rate can be the difference between paying and saving thousands of dollars.
For example: The difference between a 3% and 3.5% interest rate on a 15-year mortgage of $200,000 is $8,749.80 over the term.
Because of the enormity of the potential savings, being informed about your actual lender credit score as well as developing a specific plan of action to increase your score only works to your advantage.
Conclusion
Especially considering the complexities, and at times, the counter intuitive measures that actually impact your credit score, such as paying off a creditor, the smart first step for people looking to buy a home is to sit down with a mortgage broker. Having a professional review your situation and provide valuable insights on your specific circumstances will help you develop a tailored game plan to owning your dream home sooner.
What people don’t realize is that the mortgage business is very much a service-based industry. Mortgage professionals, especially at CMG, don’t earn awards or bonuses for getting patrons trapped into the highest interest rate mortgage out there with unmanageable payments. When they write loans beyond patron’s abilities, it damages their business as well.
Your success fuels their success, which is why they work so hard at developing achievable actions to get you the lowest interest rate possible.
Call 619.554.1327, or email [email protected] to schedule a complimentary consultation with a local CMG Mortgage Consultant today.
