When you’re ready to buy a home, your credit score plays a major role in what kind of house you can afford and your mortgage payments - especially the interest rate.
In this blog, I’ll cover all the credit basics to get you started, which includes credit bureaus, credit scores, how credit scores are calculated, and how all this affects you as a home buyer. When we’re done, you’ll understand how credit impacts your ability to get a mortgage so you can make smart home buying decisions.
There are three major credit bureaus mortgage companies use when considering your qualifications: Transunion, Experian, and Equifax. You also may occasionally hear about Innovis. Each of these provides businesses with identity verification, credit reports, and fraud prevention services.
Keep in mind - credit card companies, car companies, and mortgage lenders use slightly different models to determine credit risk. Today, we are focusing on mortgage-related credit.
With current credit models, credit scores range from a low of 300 to a high of 850. Every so often, you may find a rare exception that manages to go outside these brackets. These exceptions are due to some lenders using dated credit scoring models. Regardless, lenders are assessing your credit risk.
The image below will provide a quick 101 on the different credit scoring models:
*Credit Model Ranges Chart by Credit Sesame
In a nutshell, if your credit score is 800+, you are exceptional and don’t need to worry about your credit. Keep doing what you’re doing. For those of you below 600, we’ve got some work to do.
Tri-merge score and how your credit score is calculated.
Mortgage lenders use a comprehensive system of checking credit called a Residential Mortgage Credit Report (RMCR), commonly called a tri-merge report. The tri-merge report combines your three credit reports from the three national credit bureaus to provide a more complete picture of your credit behavior.
Once all three are pulled, lenders use the average of the three scores to determine your loan qualification and interest rate.
The credit referenced below has three scores from the tri-merge report. Equifax = 624, Transunion = 618, and Experian = 599. One of their scores is below 600, but their middle score is 618.
When applying for a mortgage, it’s important to understand which score we’ll be using. Particularly, if you’re utilizing credit score tracking. All mortgage companies, including NewCastle Home Loans, use the middle score when calculating your qualifying credit score. When there are two borrowers, they will use the lower of the two middle scores.
Depending on the loan product you’ll be using for your mortgage and home purchase, there are different requirements for different loan programs. FHA allows for as low as 580, and the majority of other loan products require 620+. But getting a mortgage with bad credit will be very difficult.
What is a good score?
As you have read, your actual score in a given situation can vary. Credit scores change all the time and change every time a creditor reports something to the bureaus. With this in mind, below is a general guideline to what constitutes a healthy FICO credit score or a credit score that needs work:
FICO Credit Score Categories Credit Score Range
Excellent 750 and higher
Good 700 - 749
Fair 650 - 699
Poor 550 - 649
Very Poor 549 and lower
If you’d like to know what your rate would be for your score bracket, use our mortgage calculator on our home page. You can even run different scenarios with different credit scores to see how your interest rate changes.
Each scoring model uses a complex array of algorithms to assess your past relationship with creditors and your creditworthiness, or likelihood of good relationship with similar creditors in the future. In a simplified interpretation, these algorithms can be broken down into a few key areas:
- Amounts owed - Do you have more available credit than used?
- Payment history - Have any payments been made more than 30-days late?
- Derogatory marks - Collections, tax liens, bankruptcies, and judgments
- Credit age - How long have you been using credit?
- Number of accounts - How many accounts are reporting to credit?
- New credit/inquiries - Number of times you’ve applied for credit recently
How do I monitor my credit score?
There is a slew of services out there that will assist in monitoring your credit as well as alert you when there is a major issue. Performing a quick Google search will provide you with plenty of options. In fact, when you open a credit card, many of those companies offer online credit monitoring free of charge.
What your credit score means for you and buying a home.
Your credit score is used for housing, employment, car loans, credit cards, personal loans, and private deals. Basically, this means credit scores are used in nearly every major financial interaction of your life in the United States.
Whether you’re renting or buying, your landlord or lender will review your credit as part of their determination for whether or not you’ll qualify. It’s important to build your credit or repair your credit to secure stable housing.
Plain and simple: The better your credit score, the better interest rate you’ll receive and the more loan options you’ll have when buying a home.
Conclusion and additional information.
Hopefully, you now have a good idea of who the players are for your credit scores and how these are used for your various loan products. Having a decent credit score is important as credit is increasingly used in every part of our financial life. If you’d like to have a decent paying job and stable housing, it’s important to work on your credit.
Ready to get going on improving your credit? Here are a couple additional blogs to help you out: