If you are planning to apply for a home loan in the near future, you are probably monitoring your credit score closely. You are paying attention to your score on the top of bank and credit card statements. Maybe you are tracking it via a budgeting app like Mint or NerdWallet. If you are savvy, you are also monitoring your credit, and personal identity usage, on free government sites like annualcreditreport.com. But even the most diligent of loan applicants may be surprised when their credit score is pulled for a home loan and it is lower than expected. Here is our advice for accessing your correct credit score and knowing how to maximize it to your advantage.
WHY CREDIT SCORES VARY
One of the biggest misconceptions people have is that they have one credit score. In actuality, you have multiple credit scores. Consider all the big data that credit institutions have access to. Then consider how it is in the credit industry’s financial interest to provide multiple versions of this data: more reports equals more money. Each lending industry prefers to look at different data as well. Hence, if you took out a car and home loan on the same day (which, by the way, we do not recommend) you would most likely leave with two different credit scores.
KNOW YOUR CLASSIC FICO SCORE FOR A HOME LOAN
In the mortgage industry we use the Classic FICO Score, which includes a standardized report from Experian, Equifax and Transunion. To access your accurate Classic FICO credit score visit myfico.com. You may pay for a one-time 3-bureau report or sign up for a subscription plan. Once you receive your report, keep in mind that with:
- One applicant, lenders will use the middle score.
- Multiple applicants, lenders will use the lowest of the middle scores.
HARD VS SOFT CREDIT PULL
When you pull your own credit, it is considered a soft pull. You may initiate as many soft pulls as you would like and will not affect your credit.
When a lender pulls your credit for a pre approval it is considered a hard pull. Hard pulls (or inquiries) are listed on your credit report for 24 months. However, they are used to determine a FICO score for only 12 months. Therefore, several hard credit inquiries within 12 months or less can impact your score up to 5 points per pull. The impact will be more pronounced for individuals with a short credit history or those deemed as being higher credit risks.
WHAT YOU NEED TO KNOW ABOUT CREDIT SCORE TIERING
Your credit score will determine your loan’s approval, pricing and affordability. There are 11 credit tiers with a 19-pt score spread between each tier. Within these tiers, whether you are at the low or high end, the pricing of your loan is consistent. If you are on the cusp of one of these tiers, you may want to work with a certified credit counselor to improve your score and consequently your pricing. Pricing typically improves as your credit score rises.
CREDIT SCORE TIERS FOR HOME LOANS
Those with a 620 score or lower do not typically qualify for a home loan. You will want to partner with a certified credit counselor if your credit score is below 620.
As of May 5, 2023, new loan-level pricing adjustments (LLPAs) will take effect that consider traditional credit score and loan-to-value (LTV) ratios along with new Debt to Income (DTI) and other factors when determining pricing.
Please contact Cori Pugsley at Movement Home Loans if you have questions regarding your credit score or would like a referral for a certified credit counselor.
Cori Pugsley is a Mortgage Advisor with Movement Home Loans, a locally-owned and operated mortgage brokerage offering nationally-competitive rates, astute counseling and reliable closings. Contact her with questions or to apply for a loan.