Your credit profile can have a meaningful effect on your mortgage options. Depending on the loan, lender, and your overall financial picture, stronger credit may help you qualify for more favorable interest rates, fees, or loan terms. But there isn’t one credit score that guarantees the “best” mortgage. Understanding what lenders look at — and knowing what to do before you apply — can put you in a better position when it’s time to finance your home.
Your credit scores are calculated from information in your credit reports. Although scoring models differ, factors that can affect your scores include:
- Your history of making payments on time
- The balances you carry relative to available revolving credit
- The length and history of your credit accounts
- The types of credit accounts in your history
- Recent applications or inquiries for new credit
- Collections, charge-offs, or other negative information that may appear on your reports
HOW IS CREDIT ESTABLISHED?
A credit history develops as creditors report information about accounts and payments to the credit reporting companies. Credit cards, installment loans, auto loans, student loans, and other accounts may become part of that history when they are reported.
If you’re just beginning to establish credit, a secured credit card may be one option. Becoming an authorized user on another person’s established account may also affect your credit history if the issuer reports authorized-user activity, although the results can vary and the primary account holder’s activity can affect you as well.
The important point isn’t to open accounts simply to build a score. Responsible use of existing credit, paying obligations on time, and keeping balances manageable can help establish a positive history over time.
WHICH CREDIT SCORE DOES A MORTGAGE LENDER USE?
You may have more than one credit score because different credit bureaus, scoring models, and report information can produce different results. Mortgage lenders also follow specific rules for determining which score or scores apply to a particular loan.
Those rules can vary by loan program, underwriting method, and whether there is one borrower or more than one. That’s why the score you see through a bank, credit card company, or consumer credit service may not be identical to the score used for your mortgage application.
WHERE DOES YOUR CREDIT SCORE PUT YOU?
There is no single credit-score requirement that applies to every mortgage. Conventional, FHA, VA, USDA, jumbo, and other loan programs have different guidelines, and individual lenders may apply additional requirements.
For example, VA itself does not establish a minimum credit score for its home loan guaranty, although individual VA lenders may establish their own standards. Other programs may use credit scores differently depending on the loan and underwriting method.
Credit also affects more than eligibility. In some situations, a stronger credit profile may result in more favorable pricing or financing choices. Rather than assuming that a particular score automatically qualifies or disqualifies you, ask a mortgage professional to explain what your current profile means for the loans available to you.
CAN YOU IMPROVE YOUR CREDIT BEFORE APPLYING?
Possibly — but this is one area where it’s better to have a plan than to start making changes on your own.
Good places to begin include reviewing your credit reports for errors, continuing to make payments on time, and keeping revolving balances under control. You can obtain your credit reports through AnnualCreditReport.com and dispute information that is inaccurate.
If you’re preparing to apply for a mortgage, talk with your lender before opening or closing accounts, transferring large balances, financing a vehicle or other major purchase, or making significant changes intended solely to improve your score. An action that seems helpful may affect your credit, debt-to-income ratio, available cash, or underwriting in ways you didn’t anticipate.
Your credit score is important, but it is only one part of your mortgage application. Income, existing debt, assets, down payment, loan program, property costs, and other factors can also influence the financing available to you.
For more information, you can read these suggestions for improving your credit score from NerdWallet. And if you’re considering buying a home, I can recommend knowledgeable mortgage professionals who can review your individual circumstances and help you understand your options before you start making financial changes.