If you’re considering purchasing a home anytime soon there are a few important steps you absolutely should do before completing a home loan application. Your credit score and the amount of your down payment play an immense part on your home loan terms.
The lender needs to determine how much a risk you are based on your financial responsibility and the higher your credit score is, the better risk you are.
In addition, the higher your credit score the more likely you will be eligible to get the best interest rate so it is a smart move to increase your score as much as possible by being financially responsible.
The maximum credit score is 850. Here is a breakdown of credit scores-
• Excellent credit – above 740
• Very Good credit – 700-740
• Okay credit – 660-699
• Fair credit – 620-659
• Bad credit – below 620
Get your mortgage rate based on your credit score.
For those looking to buy or refinance a home you should meet the minimum credit score requirement of 620 for traditionally documented loans and 680 or higher for most jumbo loan programs.
If you’re working on boosting your credit score, there’s a few ways to increase it. One of the best strategies is to pay down any balances on credit cards and of course make your payments on or before the due date.
There’s certainly a few more great tips to raise your credit score you may not know about. You just need to know where to look or who to speak with.
Are Credit Karma credit scores accurate for buying a house?
More than 90% of lenders prefer the FICO scoring model, while Credit Karma uses the Vantage 3.0 scoring model. Overall, your Credit Karma score is an accurate metric that will help you monitor your credit — but it likely won’t match the FICO scores a lender looks at before giving you a loan.
Which FICO score models do most mortgage lenders use?
In all of the residential mortgage credit reports I’ve seen, lenders use
Equifax Beacon 5.0.
Experian/Fair Isaac Risk Model V2 SM.
TransUnion FICO Risk Score, Classic 04.
A large majority of lenders use FICO 2, 4 and 5 scoring models to run a prospective borrower’s credit. These are all found in the residential mortgage credit report (RMCR).
The RMCR normally includes information about your past employment, addresses where you’ve lived and any legal filings such as bankruptcies, foreclosures, judgments, or tax liens. This helps the mortgage lender cross reference what’s is shown or omitted on your loan application.
Mortgage Credit Score vs Consumer Vantage Score
Vantage score provided by banks and credit card company’s monitoring service gives you a FICO score alternative through a partnership among the three credit bureaus — Equifax, Experian, and TransUnion.
The most important difference between FICO scores and Vantage scores is the range of scoring. Vantage scores vary from 501 up to 990, while FICO scores start at 300 to a maximum of 850. These are huge differences. As you can see, the Vantage score from your credit monitoring service could be substantially higher than a FICO score the lender pulls. In short, this means do not rely on Vantage scoring when shopping for a mortgage.
Although your Vantage score will give you a credit score, it is not the score used by mortgage lenders. In a large number of cases, it has not been very useful score to consumers.
We’ve worked with borrowers where their Vantage score (obtained from CreditKarma) are 30-60 points different (higher) than what a mortgage lender gets. There are worse reports than that, if you go to some of these forums to read people’s experiences.
It really is a headscratcher why people continue to pay for a service with highly inaccurate scoring when you can get exactly what you want with MyFICO.com. They offer credit monitoring and you can select the exact FICO version, 2, 3 or 5 and be pretty close to what a mortgage lender will pull. Sign up to monitor all 3bureaus because sometimes one bureau may not have removed an error on your report.
While you can remove the error during the mortgage process, it could delay the closing date, or even worse, you may be at risk of losing your earnest money deposit on a purchase contract because your credit is not in order.
Here’s an example below.
Your lender pulls your scores, and they tell you your credit scores are 767, 715, and 692. Let’s say the rate is much lower if you have a 720 or higher middle score. They inform you there’s a collection of $2,400 that you know was paid and never late.
You have the creditor’s letter stating it was paid in full. However, the letter was only sent to TransUnion, and not Experian and Equifax showing scores of 715 and 692. The lender informs your Experian score will increase to 772 estimated if this collection is removed.
To get this corrected quickly the loan originator advises you to do a “Rapid Rescore” which costs $30 per bureau and $35 for 24-hour turn-around. You go ahead and pay for both bureaus $130 to be on the safe side. This oversight by the borrower delays the mortgage process by 2-3 days. The cost to monitor all 3 bureaus is just $100 and well worth the cost.
Keep in mind just because you were approved for a credit card or auto loan, it doesn’t mean you’ll be approved for a mortgage. Lending guidelines for a credit card or vehicle are different and not as specific as for a mortgage.
Some credit card companies require a minimum credit score of 700, 660, etc, based on the FICO Bankcard scoring or the FICO Auto score for financing a car or truck.
FICO 8 vs. Mortgage Score
A couple of things about FICO scores is it can become pretty confusing because some financial reports claim there are up to 56 different versions of your FICO score. According to MyFICO.com, the FICO Score 8 is the most commonly used.