However, the credit score that you view for yourself and the score that they analyze to determine your lending worthiness are not always the same. In order to present the best case for favorable terms on your loan, it is important to understand which credit scores mortgage lenders will examine during the approval process.
What Are The Different Types Of Credit Scores?
Credit scores are not the same across the board; in fact, three major credit bureaus manage each individual’s credit score, and each bureau conducts the process slightly differently. This results in slightly variable credit scores among the three. Experian, TransUnion and Equifax are the three bureaus in charge of managing credit scores, and each one will keep a score for you, regardless of whether you have previously conducted any business directly with them.
In addition to each bureau’s individual ways of calculating a credit score, FICO (from an abbreviation of Fair, Isaac and Company) has created specific models through which each bureau does its credit scoring. When mortgage lenders pull your credit score, they are not just looking at one bureau’s report; they will evaluate all three.
Which Credit Scores Are Mortgage Lenders Primarily Interested In?
TransUnion, Equifax and Experian will each provide a credit score for the lender when they are determining your chances of loan approval. The three scores they will look at specifically are the FICO® Score 2 (sometimes called the Experian/Fair Isaac Risk Model v2), the FICO® Score 5 (known as the Equifax Beacon 5) and the FICO® Score 4, or TransUnion’s FICO® Risk Score 04.
If you are trying to improve your chances of being approved for a mortgage loan, try to keep your credit score at a minimum of 580 in this middle range. Carrying a credit score lower than this could dramatically impact how favorable your mortgage terms are (such as only qualifying you for a high interest rate) or may prevent you from qualifying for a loan at all. The higher your score, the more favorable a loan may be. Scores of at least 700 are considered to be very good, and a score of 800 or above is exceptional.
Small Changes That Can Impact Your Credit Score
If you would like to improve your credit score before applying for a mortgage, or if you are planning on making certain purchases during the process of acquiring a home, there are a few things to know. Paying off credit cards on time, not missing payments on debts and not utilizing a significant portion of your credit are powerful ways to boost your credit.
One of the most detrimental things an individual can do during the home buying process is to begin purchasing furniture and other items on a credit card in preparation for moving in. This will increase your debt to income ratio, which can negatively impact not only your credit score but also your overall financial picture evaluated by lenders.
It is not uncommon for inexperienced buyers to be preapproved, begin putting home-related purchases on a credit card, and then find themselves denied during the later parts of the purchase process due to the credit and financial solvency evaluations that ensue.
Talk To The Mortgage Pros For Guidance During The Loan Process
The professionals at Fairfax Mortgage Investments would be happy to help you achieve advantageous terms on your mortgage and prepare you for the process of closing on a home. Reach out to schedule an appointment to discuss your situation and develop a strategy to put you in the best position possible for this important financial decision.
Your credit score is just one element that goes into a lender’s approval of your mortgage. Here are some other things lenders look at.
1. Debt-To-Income Ratio
Debt-to-income ratio, or DTI, is the percentage of your gross monthly income that goes toward paying off debt. Again, having less debt in relation to your income makes you less risky to the lender, which means you’re able to safely borrow more on your mortgage.
To find your DTI, divide the amount of recurring debt (credit cards, student loans, car payments, etc.) you have by your monthly income. Here’s an example:
If your debt is $1,000 per month and your monthly income is $3,000, your DTI is $1,000 / $3,000 = 0.33, or 33%.
It’s to your advantage to aim for a DTI of 50% or lower; the lower your DTI, the better chance you have at being offered a lower interest rate.
2. Loan-To-Value Ratio
The loan-to-value ratio (LTV) is used by lenders to assess their risk in lending to you. It’s the loan amount divided by the house purchase price.
For example, let’s say you buy a home for $150,000 and take out a mortgage loan for $120,000. Your LTV would be 80%. As you pay off more of your loan, your LTV decreases. A higher LTV is riskier for your lender because it means your loan covers a majority of the home’s cost.
LTV decreases when your down payment increases. Going off the example we’ve just used, if you get a mortgage of $110,000 instead because you put down $40,000 ($10,000 more than before), your LTV is now 0.73, or 73%.
Different lenders accept different LTV ranges, but it’s best if your ratio is 80% or less. If your LTV is greater than 80%, you may be required to pay a form of mortgage insurance . Keep in mind that this varies by loan type and some loans, like VA loans, may allow you to finance the full purchase price of the house without you having to pay mortgage insurance.
3. Income And Assets
Your lender wants to be sure that you maintain steady employment. Lenders often ask for 2 years of proof of income and assets. The steadiness of your income could affect the interest rate you’re offered.