You are not alone if you have been putting off having your credit reviewed for the purposes of getting a mortgage. There are so many things that run through people’s heads. They want to pay off all their debt, close accounts, try to quickly build credit and their intentions are in the right place, BUT it can all backfire. Credit is complex and everyone’s situation is completely different.
If you are even starting to think about purchasing a home, having your credit reviewed by a professional is absolutely the first step in the process. A mortgage lender can offer you not only a review but also guidance on anything that could improve your unique situation. Do you have these misconceptions?
- Credit Misconception #1- I Know My Credit Scores
- Credit Misconception #2- My Credit Scores will go Down if my Credit is Pulled
- Credit Misconception #3- I Need to Pay Down/Off My Debts
Credit Misconception #1- I Know My Credit Scores
There are many different ways to review your credit scores. Two of the most common ways are with a credit card that offers monthly reviews of your credit, including a score or a Credit Karma account to track your overall score movement. Both of those examples are excellent for ensuring there are no errors on your credit and that all your accounts are reporting accurately, BUT the scores that are provided by these sources are not your Mortgage Credit Scores that are used for qualifying for a mortgage loan.
So, let’s dig into this a bit deeper. There are three primary credit reporting agencies, Transunion, Equifax and Experian. These agencies gather data to create credit reports for many different types of organizations and each agency may receive slightly different data from your creditors. These three credit agencies also use different calculations to determine your score, which is why most people have three different scores.
When you apply for credit, the type of lending institution that is evaluating your credit application receives credit scores that are focused on your ability to pay on that specific item. This means your credit scores will vary from the viewpoint of a credit card company, auto loan provider, insurance company and mortgage company, to name a few.
- Credit scores typically range from 300 to 850, with the 750 to 850 range being considered excellent. Generally speaking, a 581 is the minimum credit score for a mortgage loan.
- Though, your mortgage credit scores are not the same as Credit Karma for instance, if your scores increase or decrease when watching Credit Karma they will be moving in the same direction on your mortgage credit profile.
- If you are ready to know your mortgage specific scores and discuss all the details of your credit profile, we are here for you. Connect with us now.
Credit Misconception #2- My Credit Scores will go Down if my Credit is Pulled
Having your credit pulled can affect your credit scores, BUT you just need to better understand the variables. Applying for a bunch of credit at once can greatly lower your credit; like applying for multiple credit cards, a store account, a new car, etc. When you apply for many things at once it can appear you are desperately trying to get credit. As we discussed in Credit Misconception #1, the credit agencies recognize each type of organization differently and they each can effect your credit differently.
When it comes to a mortgage loan, you can have a few mortgage institutions pull your credit in a 30 day period with no effect to your score. This is in place to make sure you can interview at least one other mortgage lender if you choose.
- Think of your credit scores as living, breathing, evolving things. They can change slightly each day as your creditors update your accounts. So, if you have one company pull your credit and then another company 15 days later the scores can be slightly different, but that would be based on updated credit information. It does not mean your score dropped because of the credit pull directly.
- During the process of looking for a home and going through the mortgage process we do ask that you avoid having your credit pulled or accumulating any new debt as there are many areas of the transaction that can be negatively effected.
- Your mortgage credit report is good for 120 days. This means your mortgage loan needs to be closed in 120 days or a new credit report must be pulled. If you have kept on track with your best credit behavior during your home shopping there should not be a major effect to your credit scores.
If credit seems complicated; IT IS! We are happy to review you personal situation with a Free Credit Consultation anytime. Just reach out.
Credit Misconception #3- I Need to Pay Down/Off My Debts
Paying down debt is never a bad thing, but it may not be needed or your best option when considering a home purchase. If you have additional funds available to pay off or pay down debt, that is great, but we want to keep in mind a down payment, emergency fund and thinking about the overall effect on your credit.
Eliminating debt is a life goal for many, but when we pay off installment loans they close out and that can actually reduce your credit score. When it comes to paying down credit card debt, you can see your credit scores increase, BUT there can be exact balances that are optimal depending upon your overall credit profile.
When considering a home purchase, you need to evaluate the BIG picture. What is best for you financial now, what can you do to improve, what will be best for your future goals? I large part of analyzing and reviewing your credit is how much debt you have but also your income and asset profile. You don’t want to drain all your assets to eliminate your debt and close accounts; this could end up with you having NO CREDIT SCORES…. yikes, all your hard work gone.
- You need to have open, active credit accounts to have a credit score. Every time you make an on-time payment you get a few more points added to score. Your balances play an additional role as the
- It may be in your best interest to pay down some accounts, but you want to first evaluate your needs for a down payment and emergency fund. Know one should ever go into a new mortgage loan with on money for emergencies.
- Don’t worry if you have NO CREDIT SCORES, there are mortgage options for your situation. They may not be the best interest rates but they are available. Also, depending upon your timeline we are happy to work you through what it would take to establish credit in the coming months.