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Credit Scores

Your credit score will have a significant impact on qualifying for a mortgage.  Besides securing the home loan, this factor can influence your pricing.  How exactly though?  Here are a few general insights from our side of the transaction so you can better understand and prepare!

  1. What credit score do you use?

    Everyone should have three credit scores:  One from Experian, one from Equifax, and one from Transunion.  We will take your middle score.  For example if Experian is 700, Equifax is 659 and Transunion is 589, we’ll use the 659.  If there are multiple borrowers, we will take the lower of the two middle scores.  That will determine your eligibility and pricing.

     

  2. Why is my credit score with you different than Credit Karma (and other similar resources)?

    Apps like Credit Karma typically use a Vantage score.  Very generically speaking, this is modeled off of FICO.  This is more or less a guess of your actual credit score based on what is connected to your identity.  This is considered a soft pull.  We execute a hard pull.  Mortgage companies have access to your actual credit score as a result.

     

  3. I just had my report pulled by another mortgage lender, will you looking again hurt my credit score?

    This depends on when the report was pulled.  If this was within 45 days, your credit score will not be affected.  There are other factors that may have influenced your score within that time frame though.

     

  4. How is a credit score determined and improved?

     

    There are five different factors that will impact your credit score.  Each one is weighted differently.  Here is a breakdown of each:

  •  Payment History (35%):  Bankruptcies, collections, foreclosures, late payments, and other similar blemishes can negatively impact this category.  If you actively make payments on-time then you will optimize this factor for your credit score.  For example, if you have a credit card (you probably should but each situation is different), you can charge groceries and pay the debt off in full every month.  This will positively affect your payment history.

  • Utilization Ratio (30%):  This refers back to those pesky credit cards.  Your balances across all of your active credit cards is compared to the cumulative limits.  For example, if you have three credit cards with a $1,000 limit each, your cumulative limit is $3,000.  If one is maxed out to the $1,000 limit and the other two have no balances, your utilization ratio is 33% ($1,000 divided by $3,000).  The target is 30% or better.  The more this is consistently maintained, the better this factor will influence your credit score.  One tip is to pay the balance off or down before your creditor issues the statement.  The balance is reported to the bureaus (Experian, Equifax, Transunion) when this is issued.  If your proactive, you’ll still get a positive impact for the consecutive on-time payments and optimize your utilization ratio.

  • Length of History (15%):  The longer you have an active account, the better your score will be.  For example, if you get a credit card when you’re 16 years old and you’re now 30, that means you’ve had an active account for 14 years.  That looks good to the bureaus.  If you opened up a credit card two years ago and maintained the other one, the average age is now reduced to 8 years (14+2 = 16.  16/2 = 8).  If you close out that older account, your average age is not reduced to 2 years.  Keep in mind, this is only 15% of your score but the positive influence can get you from not qualify to qualifying.  It can also save you money by elevating you to a better credit tier.  Remember, a traditional mortgage is for 30 years!  

  • New Debt (10%):  This refers to companies making a hard inquiry on your credit report to grant you credit cards, car loans, student loans, personal loans, mortgages (obviously), and other similar debts.  The more you have lenders make a hard inquiry on your report, the more your score will be reduced.  Remember, you do have that 45 day window with mortgage companies due to the nature of this debt.  This can impact your credit score for about 1 year before the inquiry goes away.

  • Mix of Debt (10%):  This refers to the different types of trade-lines you have.  For example, if you have one credit card and one car loan, those are two different types of debts.  Diversity in this mix can only help you.  From what I understand, two to four active trade-lines are ideal.  Keeping a mortgage and a credit card might be a great dynamic but of course, I’m biased.  At the end of the day, the bureaus issue your credit score but they want to see you responsible for different types of trade-lines to optimize your credit score.

Final Notes

I hope you learned more about your credit score today.  Keep in mind, every situation is different and there are more detailed layers to everything I just analyzed.  There are even mortgage products that may not even require a credit score.  If you want to have a discussion to figure out ways and strategies to optimize your credit score, you can make an appointment through that chat bot at the bottom right corner of your screen.

Remember, Nebo Lending offers a Better Way to Mortgage.  Thank you for reading.

 

Mike Pietila
NMLS ID 847850
Nebo Lending CEO