Your Credit Score & Mortgage Loans

Your credit score is one of the biggest factors in your approval for a home loan. It is also used to determine the pricing for your interest rate and monthly mortgage insurance premium.

The lower your score, the more costly your loan may potentially be. When you apply for a mortgage, a tri-merge credit report will be pulled prior to issuing any type of letter. The tri-merge report will include your scores from the three credit bureaus, Equifax, Transunion and Experian.

A lender is going to use the middle of the three scores (or median score) to determine qualification. If there are multiple borrowers, we are required to use the more conservative number or the lowest of all the borrower scores.

Mortgage lenders typically use a version of a FICO score model. Other creditors/credit monitoring systems use a different scoring model. Each model weighs factors differently when determining your scores. This is why your credit score may differ between a credit monitoring site and your mortgage application.

Here is how a FICO score model weighs each of these factors:

• 35% - Payment history
• 30% - Amounts owed to creditors
• 15% - Length of credit history
• 10% - New credit accounts

It’s important to monitor your credit and start building it up (if you have a lower score) to ensure you are able to take advantage of all mortgage options available. Below are some credit tips to keep in mind when you are starting your home loan journey.

1. Do not apply for any new credit, make major purchases or consolidate debt. All of these can impact your potential buying power.
2. Do not max out your credit cards. Keeping your balances at 30% or below their available limit is best.
3. Keep all existing accounts current. Setting up automatic payments will help keep you on track.
4. Do not close out old revolving accounts that you are no longer using. The length of your credit history impacts your score and closing them out cancels that history.
5. Maintain a healthy mix of credit in use. Having a mix of installment and revolving debt will positively impact your score.
6. Avoid co-signing on loans. These debts are included in your ratios and if payments are late it will have a negative impact on your scores.
7. Monitor your credit and report any fraud immediately. You can get your free annual credit report at annualcreditreport.com.

Source: cuna.org