Credit score and credit reports are terms being tossed around all the time in the mortgage world, but why is it so important and what does it mean to you regarding to purchasing your first home? Below you will find out exactly what a credit score and report is how they affect your mortgage, and how to get a credit report. Ready? Let’s dive in.
First things first
What’s the difference between a credit score and credit report? These are two different entities but your score is developed from your report. Your report is made up of multiple things (that we will explain in more detail soon) and your score is like your report card. We’re bringing you back to school, and just like school, A+’s are best! Just a heads up you may see credit score and FICO score; these are one in the same and can be used interchangeably. Fair Isaac & Co. (FICO) is like the teacher, they assign you your number based off of the information in your credit report. Here is how you will be graded:
- Payment history: Are your bills paid on time?
- Types of credit used: This teacher likes to see it all. Credit cards, car loans, student loans etc.
- Amounts owed: This is how much debt you have.
- New credit: Have you recently applied for new credit?
- Length of credit history: The longer the history the better. Lenders like to know in as much detail your spending habits.
So exactly what type of numbers do you need receive an A+ from Mr. FICO? Let's find out.
Scores range from 350-850; an 850 score belongs to the teacher’s pet. Not really, but an 850 is the best of the best. Let’s just say you’re in the clear if you’re at a 720 or higher. Are you nervous that student loans or silly mistakes have ruined your score? Don’t sweat it just yet, many first-time home buyers choose an FHA loan and this type of loan cuts you some slack. The FHA will usually allow buyers receive their loan if their credit is at least 620 or higher.
Here’s a quick go to guide for grading your score:
- A+ = 720 and above
- B+ = 660 – 719
- C+ = 620- 659
- In need of a tutor = 619 and below
As long as your credit score is in somewhat of good standings you will be okay. Another quick bit of information; More than 50% of lenders use your credit score to determine what type of loans you qualify for, and your interest rate. So just remember, the higher your score the better!
What does a credit report consist of?
A credit report is basically a roadmap of your financial records. It holds all your records of borrowing and repaying banks, credit cards, and any other place you have borrowed money. This roadmap lets us know if you will be a risky client or safe reliable one. And like stated before, lenders will base your interest rate off of your report and the corresponding score.
We will lay it out easy for you:
- Your personal information: name, address, previous employers, and SSN.
- Credit history: Including account information, payment history (specifically any information about debt).
- Anyone that has pulled your credit will also show up on here.
- Public Records: judgments, bankruptcy, etc.
- A section for comments if you have ever disputed the reports in the past.
How does this affect my mortgage?
Knowing what your credit rating is will help you tremendously during the home loan process. Checking your rating before beginning your serious search is highly recommended. Because your score affects so much about your mortgage; what type of loan, if you even qualify, what your interest rate will be and more, it is important to have a full understanding of what you are able to do before falling in love with a home. Knowing your standings, you have the ability to clean up any errors, and improve your score if need be before diving into the home buying process.
Interested in seeing your report?
No problem, you can receive a free credit report annually! Call one of our mortgage bankers to receive and review this report with us! Your report comes through a website that pulls your credit report from the three big credit-reporting agencies: Equifax, TransUnion, and Experian. We encourage you to take advantage of viewing your report once a year. It helps you understand what grade your credit score falls on and you can correct any errors that might have occurred.