As we all know, credit is critical when determining your ability to qualify for a home loan. But do you know about the different types of credit and truly understand how your financial activities can impact your credit when you’re ready to apply for a mortgage? We have answers. In this post, we debunk three common misconceptions about credit you need to know before starting the home loan process.
Working with lending clients has led us to believe there are three common misconceptions about credit scores:
- All Scales Are Created Equal
- My Score is Accurate and Won’t Change
- Pulling My Credit Will Hurt My Credit
Misconception #1: All Scales Are Created Equal
Imagine tracking your credit score via mobile app for over a decade to later find the number you thought you had, wasn’t the one that would be used on your home financing application. We find that about half of our clients expect their credit score to be 100 points higher than it is. It’s not a result of bad data, but rather the wrong understanding of how that data will be used for your home financing application. We’d be confused, too. But there’s an easy explanation.
A credit score is a number that represents your creditworthiness, or likelihood to pay back your debts. It is a misnomer to think that a 720 FICO Score is the same as a 720-credit check from a credit application. It isn’t that one is inaccurate, but rather that each credit bureau uses different scales to determine your credit standing.
Because each credit bureau has its own model of scoring, all numbers are not treated the same. For example, many apps you may use to check your credit may be using a 300-950 scale while your FICO Score, on a 300-850 scale will be used to finance your home. Depending on the scoring model used by your score tracker, the numerical value may vary.
Although the numerical figure may change, note that the value is not. Mortgage lenders use a FICO score to determine your creditworthiness. So that 100-point drop in the initial example can be the result of conversion rather than a change in the level of your credit strength. Thus, your score is not necessarily decreasing but rather being evaluated in the correct language or scale used for mortgage applications.
Misconception #2: My Score is Accurate and Won’t Change
We all know there are small improvements that can be made to improve credit score. Although we recommend paying off debt, keeping a long-standing history of credit, and making payments on time, there are many other actions you can take during the home loan application process to strengthen your credit standing.
Often, you’ll apply for home financing, get your credit score, and then when you receive your disclosures you find that an old credit card hasn’t been paid off, two cars are listed as being leased but you only have one, or a shared credit card that your spouse missed payments for, brought down your score.
Any circumstances such as these which reflect outdated data or even errors can be fixed within the Neat Platinum Pre-Approval application, or manually by contacting the credit bureau with the error. The bureau must then investigate the item in question, which can take a full month, so the sooner you can identify and fix issues, the better it will be for your home loan. By correcting your credit history with a deep cleaning before submitting your application, you can avoid paying a higher rate due to a faulty credit score.
Many people assume that the credit they have now will remain unchangeable while applying for a home loan, but this isn’t the case. Take care to note that activities like a major financed purchase or opening a new line of credit can change your score during the process.
Misconception #3: Pulling My Credit Will Hurt My Credit
Although any credit pull can affect your credit, it hardly impacts your FICO Score at all (remember this is the data that will help approve you for home financing). Even though credit pulls will remain on your credit report for two years, FICO only considers inquiries within the last 12 months.
Additionally, FICO Scores typically consider the difference between actually opening a new line of credit or shopping for a loan, so unless you’re going to shop around at a large quantity of lenders, you should be just fine.
Once you’ve seen your score in your loan application, be sure to follow credit best practices to maintain that score throughout your loan process and clean up anything that may hold you back from becoming a homeowner. And if something doesn’t make sense, your loan advocate is always available to help explain what you’re seeing what you can do to fix it.