Credit 101: Understanding Credit Reports and Scores for Mortgage Applications
December 12, 2023
When you're looking to apply for a mortgage, the importance of your credit cannot be overstated. Lenders consider your credit score as one of the most crucial factors in determining whether or not to approve your mortgage application.
What is a Credit Report?
Annualcreditreport.com defines a credit report as a comprehensive record of credit-related activities. This means the three credit reporting agencies (Experian, Equifax, and TransUnion) collect information from businesses that lend to you. These credit agencies report on items such as:
- the date a loan began
- the original amount of a loan
- current balance
- current payment history
This information is reported to any of the three credit reporting agencies and is formulated into an organized list that reflects your borrowing activity.
Where does my credit score come from?
The information from your credit report feeds into a mathematical formula that analyzes your information and generates a score. This score indicates how likely you are to pay your bills and debts in the future. The mathematical formulas for each credit reporting agency are different; therefore, your scores may vary from one agency to another. However, according to myfico.com, credit scoring information is weighted as follows:
A mortgage lender will request your report and score from each credit reporting agency and then use the middle of the three scores as the primary score for lending eligibility. For instance, if Experian reports a score of 683, Equifax reports a score of 672, and TransUnion reports a score of 658, the lender will use the middle score of 672 as the primary score for lending eligibility.
What does my credit score have to be to get a mortgage?
When it comes to getting a mortgage, people often wonder what their credit score needs to be. FICO scores, which range from 300 to 850, determine your creditworthiness. Generally, the higher your credit score, the better. However, there is no single magic number that guarantees approval.
To answer the question with a number, 640 is a good score for most mortgage lending situations. But keep in mind that your mortgage lender and the type of mortgage you choose will determine the minimum credit score required. Government loans do not have a minimum credit score requirement, but a lender may set a minimum to mitigate risk. For low down payment conventional loans, the minimum credit score required may be higher than 640.
It's important to note that credit score is just one-factor lenders consider when determining mortgage eligibility. Even with a great credit score, you may not automatically be approved for a mortgage. Lenders will review your entire credit report to assess your overall creditworthiness.
Can I improve or maintain a good credit score?
Yes! Practice good credit habits each month by doing the following:
1. Always pay your bills on time every month.
2. Do not borrow the maximum amount on your credit cards. For example, if your credit card limit is $2500, it's best not to borrow more than half of that, and make sure to pay it back on time.
3. Keep your credit balances low and try to limit the number of creditors you have on your credit report.
4. Instead of moving debt around, pay it off as soon as possible.
If you want to improve your credit score, follow these tips:
- Pay down any accounts that are near their maximum borrowing limit.
- Identify what's bringing your score down, such as collections, judgments, or charge-offs, and work to resolve them.
- Check for errors on your report, such as accounts that aren't yours or inaccurate reporting, and contact the company responsible to request a correction.
- If you've had a bankruptcy, foreclosure, or both, you'll need to wait until the time limit has passed before you're eligible for a mortgage. It's also important to check your credit report for correct reporting of the event.
Credit reports and credit scores can be complex, but it's essential to manage them instead of letting them dictate your financial life. At First Bank and Trust Company, we understand that you are more than just a credit score, and we strive to serve your individual needs. Our mortgage loan originators are knowledgeable in credit and the entire mortgage process, and we're here to help you with your home purchase, construction, or refinancing. We listen to your unique needs and use our expertise to support you throughout the process.