Home Mortgage Loans & Your Credit Score: What You Need to Know
Despite their importance and influence when it comes to obtaining a mortgage and financing a home purchase, most home buyers have a limited understanding of what credit scores are and what they mean.
Here, our mortgage experts will tell you everything you need to know about credit scores in relation to home mortgages so you’ll be well prepared as you start the mortgage process and work towards purchasing your next home!
What is a Credit Score?
A credit score, sometimes referred to as a FICO Score, is a number that is calculated using software from Fair Isaac Corporation (FICO). This number is a summary of your credit history that represents your credit risk. It shows ‘at a glance’ whether your credit is poor, fair, good or excellent. If you have made a major purchase in the past, such as a car, your credit score was likely mentioned to you during the loan process.
Check out the following short video for a quick summary and overview of the basics of credit scores:
Lenders base credit decisions on your FICO score, using it to determine things like what your loan’s interest rate will be when you apply for a loan. FICO scores range from a low of 300 to a high of 850. The higher your FICO score is, the better.
Below is a chart from myfico.com which shows a general breakdown of how a FICO score is determined.
If you do not know your current credit score, that’s okay. We can pull a credit report for you as part of the mortgage process!
What is Considered ‘A’ or Good Credit?
There is no one-size-fits-all answer to this question. Maple Tree Funding works with dozens of lenders to try and find you the best home loan, based on your needs. Each lender will have different standards. Some may consider a score higher than 660 to have an ‘A’ credit score, and others may want to see scores above 720.
Overall, those with scores in the mid-600s to the mid-700s are considered to have good credit. The higher the number, the more likely you are to be approved for the loan, dependent on other factors such as what your debt-to-income ratio will be. By getting a mortgage pre-approval, you’ll be able to determine ‘how much home’ you can afford.
If you have a FICO score in the mid-700 and higher, you are in the excellent range, and have a very high likelihood of getting the loan you want at a very competitive rate.
If you have a score below 660, you might still qualify for a mortgage, but the interest rate, for example, might be a little higher than average. As Maple Tree Funding’s loan officers work with dozens of lenders throughout New York, we have many mortgage options to explore. We will do our best to find you a mortgage that will fit your financial situation, even if your credit is less than ideal.
What is a Credit Report?
The FICO score that summarizes your credit history is provided to lenders by credit reporting companies. This number will be accompanied by a report that details the data that was compiled to create that score, and will often indicate the factors that may be impacting your score. For example, your payment record may be excellent, but your amount of ‘potential’ debt may be high. This will be indicated on the report.
Generally speaking, this score and its accompanying report is intended to predict how likely you are to repay a loan according to the loan terms. FICO bases this on their statistical analysis of millions of credit histories. The specific factors they use in this analysis are not known, as they are proprietary to FICO. However, it is generally known that these factors may be used to determine your score:
- The amount of credit you already have outstanding — student loans, car loans, credit cards, etc.
- Your payment history on that outstanding credit
- Any credit problems you may have had in the past, such as bankruptcies or a history of late payments
To improve your credit-worthiness consider:
- Reducing the amount of debt you have
- Making your payments on time and in full
While it is true that your credit report is compiled over a span of several years, and the more time you have to work on improving your score, the better – all is not lost if you need a short-term fix. There are a few easy ways to improve your credit score yourself.
Where Does My Credit Report Come From?
Credit reporting companies, also known as credit bureaus, collect and aggregate consumer credit information. They gather information from the companies you do business with and then sell it, in the form of a credit report, to organizations – like mortgage lenders – that have a legal and legitimate right to review the information.
The three major credit reporting companies you should be aware of are:
Equifax Credit Information Services, Inc
P.O. Box 740241
Atlanta, GA 30374
Phone: 800-685-1111
www.equifax.com
Experian
955 American Lane
Schaumburg, IL 60173
Phone: 888 397 3742
www.experian.com
TransUnion
Post Office Box 2000
Chester, PA 19022
Phone: 800-888-4213
transunion.com
If you’re trying to apply for a mortgage and the bank or mortgage lender receives varying scores from the three credit bureaus, they will use the middle of the three credit scores. If you’re applying with a co-borrower, the bank will use the lower middle score of the two borrowers applying for the loan.
Why Should I Know My Credit Score Before Buying a Home?
If you’re applying for a mortgage or home loan, it is very important to check your credit score for a variety of reasons! Here are a couple of the key reasons why checking your credit score before applying for a mortgage is imperative:
1. Credit Scores Tell Lenders About Your Ability to Purchase a Home
If you’re planning to apply for a mortgage, you should be aware of the information that lenders will be receiving about you when they review your credit report. A credit report will provide three credit scores – Equifax, TransUnion and Experian. It will also show your credit history, your open and closed balances, your current liabilities as well as bankruptcy and foreclosure information. This information will help you understand your credit, and will assist the lenders you are working with in determining whether or not you qualify for a loan.
While lenders will analyze your employment history, your ability to repay a loan and your assets, your credit score is a very important part of your overall profile that will help them to determine your ability to obtain a home loan.
2. You May Be Able To Improve Your Credit Score Before Applying for a Mortgage
Your credit score is something that can be analyzed and improved upon based on what your history shows. By reviewing your credit score before moving forward with a mortgage application, you can make some adjustments to improve your credit score in order to ensure that your credit score is as good as it can be before applying for a mortgage.
Late payments are a big reason for having a low credit score. Having a high balance on a credit card or not having enough open trade lines can also negatively affect your credit scores. If you consistently use 100% of your available credit on your credit card, your credit score may be impacted. Using 40% of less of your available credit can help you to increase your score. Additionally, sometimes opening up a Secured Credit Card to establish an additional active trade-line is one of the biggest “score bumps” that a client can do!
Maple Tree Funding has a Credit Repair Expert program that helps us guide clients to better credit scores. With our program, you’ll follow a step by step procedure to improve your credit score with the goal of achieving a score high enough to put you in a position to purchase a home. When you apply for a loan through us, we offer this analysis as part of obtaining your mortgage along with a copy of your credit report.
How Do I Improve My FICO Credit Score?
As mentioned previously, the best way to maintain and improve your FICO score is to manage your credit responsibly over time. But if you have a less-than-ideal credit score, don’t worry! There are various ways you can work towards gradually improving your FICO score, including:
1. Make your credit payments on time
On time payments contribute greatly to your FICO score. Be sure to set reminders for yourself and keep track of when your payments are due.
2. Pay down your debt
Reducing the amount of money you owe will help your score. Keep in mind, however, that once you’ve paid off a line of credit, it’s may not be beneficial to cancel your card. Often we see clients pay off a credit card they have had for many years, then close the account. This may ultimately affect your FICO score in a negative way, as the card you are canceling may be one that is helping your length of credit history.
3. Open new trade lines
Sometimes opening a new account can help your credit score. Having lines of credit open and managing them responsibly can show lenders that loaning you money is a safe and low-risk. Only do this if you are financially stable and feel that opening the new account is necessary. Having too many credit lines open can become unmanageable and may lead to credit problems!
4. Keep balances on credit cards and other accounts low
Do your best to keep the outstanding balances on your revolving accounts (such as credit cards) relatively low. This takes financial discipline, but high outstanding debt is a signal to lenders that lending to you is a risk and may increase your FICO score. Low account balances will help to maintain and improve your FICO score.
Obtaining A Mortgage with Your Credit Score
Your credit score can impact your ability to finance and purchase a home. If you’re shopping for a home, considering shopping for a home, or wondering how much you can afford to spend on a home in the future, it’s important to know and fully understand your FICO credit score.
If you want to be in the best position possible to obtain a home loan, checking, understanding and improving your credit score is imperative.
Need help understanding your credit score or obtaining a home loan? Maple Tree Funding can help!
At Maple Tree Funding, we offer a variety of home loan options, including mortgages for those with less-than-ideal credit. We will work closely with you to determine whether or not you qualify for a mortgage, help you to understand how much you can afford to spend on a home, and assist you with finding the home loan option is best for you based on your credit score and your specific situation.
Give us a call at 518-782-1202 or contact us online today to find out how we can help you make your dream of home ownership a reality.
Looking for professional assistance with improving your credit? Talk to Maple Tree Funding’s professional loan officers to find out how they can help you repair your credit and increase your credit scores. Give us a call today at 518-782-1202 or fill out our online contact form to get the process started!