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Is your credit ready for a mortgage?

By Crystal Rustad

September 2019

Things move quickly once you start shopping for your new home. One of the first steps to prepare for that large purchase is to make sure your credit is healthy – before your loan officer pulls your credit file. Here are a few credit secrets that can help you prepare.

What credit score is needed for a mortgage?

It's important to note that credit score minimums can change over time based on market conditions. But at the time of writing, Fannie Mae or Freddie Mac (which back about half of all residential mortgages) generally look for scores above 620. The minimum for the Federal Housing Administration (FHA), which backs another 10% of mortgages, is 580. Other lenders may have terms for lower scores, but often the higher the score, the lower the interest rate, and typically more favorable down payment options, private mortgage insurance (PMI) rates, and loan fees.

How do I check my score without lowering it?

Reviewing your own credit does not count as an inquiry. Only consumer-initiated requests for credit impact the score. If you do incur multiple inquiries, it is likely that they will be grouped together and count as one inquiry. This process is called de-duplication and any inquiries for mortgage, auto, or student loan that are on your credit report within the past 12 months are grouped together by category. Those inquiries for those same loan types will only count as one inquiry as long as they are initiated within 45 days of each other (or 14 days for Experian® v2).

Tip: You should review your credit report regularly at annualcreditreport.com. To be a true credit-monitoring pro, schedule one at a time for visibility throughout the year (i.e., Experian in April, Equifax® in August and TransUnion® in December).

I just pulled my credit report online – why does it look different from what my mortgage lender is seeing?

The credit report you are viewing online is likely an educational score model, and not a model used by lenders. Because of Federal Housing Finance Agency (FHFA) regulations, lenders use older versions of FICO® Score for mortgage applications (Equifax version 5, TransUnion version 4, and Experian version 2). Websites such as Credit Karma, auto lenders, and credit card companies typically use versions 8 and 9. That's also why the three bureaus score you differently, even if using the exact same information – your information is being scored with a different algorithm with every change in FICO versions.

What can I do to raise my score quickly to either meet a minimum score or get to a better interest rate?

While not all credit reports are scored the same, here are some quick ways to improve scores for most everyone:

  • Bring any active past due accounts current as soon as possible. Once in collections, the damage is usually already done.
  • Lower the balances on revolving credit (credit cards & lines of credit) until they are a fraction of your available balance – optimally, no more than 20%.
  • Request deletion letters for any inaccurate derogatory information.
  • Don't close existing accounts. This may affect the length of credit history and/or credit utilization and can lower the score.
  • Don't open numerous new accounts prior to loan funding.

Unfortunately, not all scores can be raised quickly and may require positive history for 3-12 months to show improvement (often more for collections).

You might see targeted advertisements for products such as Experian® Boost™ (which allows consumers to self-report rent, utilities, and other regular payments) or the UltraFICO™ score (which reviews history from consumers' checking, savings and money market accounts to see if there is evidence of positive banking over time). Read the fine print of these products carefully, as they are not currently applicable to the mortgage industry. Neither product applies to the FICO Score versions used in the mortgage industry today, but may allow consumers the opportunity to gain consumer credit.

Pursuing a healthy credit score and homeownership can be challenging, but the tips and facts above can help you tackle the job. The real credit secrets? Education and action! Understand your credit file, know what's contributing to your FICO score, and work to reduce balances, remove inaccurate information, and pay your bills on time.

Sources: fico.com, experian.com, credit.com

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Crystal Rustad is a Regional Account Executive for American Reporting Company focused on mortgage credit reports, appraisal management and verification services. Crystal is responsible for new relationship development and current client education in Oregon, as well as certain areas of Washington, California, and Idaho.