One of the toughest hurdles I encounter when working with home buyers, and other wise, is the conversation around pulling credit and why it's a necessary part of the home financing process. Rightfully so, having and maintaining good credit requires constant diligence and discipline; therefore, it requires fierce protection and oversight. Once earned, an excellent credit score bestows pride to the bearer of it, and clear the way for wealth building opportunities.
When it comes to lending, whether that be for a credit card, a car loan, or as I am most familiar with an application for a mortgage, a credit score - along with a detailed review of credit history gives a lender valuable insight into more than just your credit score.
The Credit Score
Just starting with the basics, the a credit review gives a lender, like myself, an idea of what type of products are available to the family applying for financing. Using the middle FICO score we can begin to determine if qualification is even possible. Mortgage companies use the middle score for qualification, so the top score is great, but it's the middle score that will be used throughout the process.
MYTH #1: The credit score I see on self-check services will be the same score that you see, so no need to pull my credit.
Wrong. Mortgage lenders (banks, credit unions, mortgage companies), along with other financial institutions that lend money, tend to use the FICO credit rating system. There are dozens of FICO score models available. For example, an auto financing company may use a model that is completely different than that used by say... a mortgage financing company.
On the other hand, FICO, is not the only credit rating system available. There are others available, so it is important to know what model you are receiving when doing self-checks or when monitoring your credit, and don't be alarmed if the score your Loan Officer pulls varies from the one you've seen.
Without an actual current credit pull, you can see how it might be hard to determine qualification if incorrect scoring models are used, or wrong scores are provided. I certainly would not want to mislead my clients by giving false hope only to find out later that the credit scores are not within the guidelines for approval.
Payment history is another important factor considered by loan officers in the mortgage process. Late payments, collections, charge offs, can raise red flags and may require further investigation to ensure that they will not hinder an approval during the Underwriting stage. One of the best ways lenders can review the information that we need is to see a full credit report that shows activity over the last 7 years.
As a trained professional, your Loan Officer will be looking for certain things that a borrower may not recognize as an issue. On the other hand, a lender can also put your mind at ease in regards to items you may believe are issues, but in actuality have little impact.
MYTH #2: Too many inquiries will ruin my score.
That depends on the type and timing of those inquiries. When it comes to mortgages FICO scoring typically makes allowances for that involve price shopping, so that typically, inquiries made by other lenders within a 30 day window are often treated as one inquiry; therefore, having a smaller impact on overall credit.
Bankruptcies, Foreclosures and Liens
Bankruptcies, liens and judgments must be addressed before closing on a new home. Bankruptcies, short sales, and foreclosures, require waiting times before potential borrowers can even apply to purchase. In my experience, often clients are unaware of how these credit items will affect their chances. In some cases, borrowers are unaware that they have incurred judgments.
Another good reason to check credit early on in the pre-qualification stage of the mortgage process is to assess the existence of major credit issues and address them with solutions, so as not to hinder a mortgage approval in the future.
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