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IF YOU’RE IN THE market for a home and a mortgage, this is a tough time, with shrinking inventory, lofty home prices and interest rates that feel overwhelming. I know all about this—because I’m a mortgage broker.
For many, today’s housing and mortgage market mean putting their homebuying dreams on hold. What if you go ahead, despite 30-year fixed-rate mortgages above 7%? I advocate controlling what you can. One of the variables that you can influence—and which can help save a tremendous amount of money—is your credit score.
Below are the six things I wish clients understood about their credit score when it comes to mortgage lending:
1. You don’t have one credit score. You don’t have three credit scores. Instead, you have multiple credit scores. Experian, Equifax and TransUnion are the three main repositories of consumer credit data. These are the folks to whom your creditors send monthly data about credit usage, late payments and so on.
VantageScore and FICO are the two main owners of consumer credit algorithms, and both companies have multiple scoring models. VantageScore is often used by consumer credit-monitoring services. Those scores will not be the same as the scores used by your mortgage lender. If I had a dollar for every time clients were shocked that their mortgage score was lower than what they thought it would be, well, I wouldn’t be retiring, but I’d be making some large donations to charity.
Mortgage lenders use FICO score models Nos. 2, 4 and 5. If your consumer reporting service tells you that your score is 750, be prepared: Your FICO score used in mortgage lending will likely be much lower due to the different scoring algorithm used. This discrepancy has huge consequences for borrowers. As I write this article, below is how rates compare for various credit scores.
2. The mortgage industry is in the process of adopting an entirely new FICO model. It’s known as FICO 10T and it’ll give trended data. Think of it this way: The current FICO models are like a static picture on Instagram, but the new trended data model will show a lender a short video, similar to a TikTok video. It’s predicted that these models will better reflect consumer behavior, so—if you have anything to clear up on your credit report—it’s important to start now. These models are set to be the industry standard by 2025.
3. It’s crucial to know your scores before starting the mortgage process. The best way for consumers to do this is to head to myFICO.com (no endorsement deal here), choose the “advanced” service and pay roughly $30. This’ll give you a full credit report. You will have to sign up for a monthly subscription plan, but just set a reminder in your calendar to cancel the subscription before the end of the following week.
This report will provide the detailed scores used in auto, mortgage and credit card lending. Fear not: There’s no negative impact on your credit score if you check your own score. You can also get a free copy of your credit report at AnnualCreditReport.com, but this will only give you the data reported on your credit report. It won’t provide any scores based on that data.
4. When underwriting your loan, lenders will use the median score. That means we line up your three scores in order from lowest to highest, and choose the score in the middle. That effectively means you can have one bad grade from one credit reporting service without risking your entire mortgage pricing.
If your loan has two legal borrowers, such as two spouses or two partners, we’ll use the lower of the two median scores for mortgage lending purposes. Result: It can sometimes be advantageous to remove one borrower from the loan, though this also means that the spouse with the lower score won’t receive the credit-score benefit of making regular mortgage payments. What if you need both your salaries to qualify for a mortgage? You need to know who has the lower FICO score and then work to improve that person’s credit.
5. Having a mortgage lender run your credit won’t greatly affect your score. For most clients, it’ll mean a five-to-eight-point drop. Once a mortgage lender runs your credit, you have 14 days to safely shop for mortgages and apply to as many lenders as you like without any impact on your credit score. The consumer credit-reporting agencies have a policy that you won’t be penalized for shopping for similar types of credit within a limited time frame. They get that you’re trying to find the best possible deal.
6. For the sake of your own sanity, take steps to limit spam emails and calls. Register with OptOutPrescreen.com and DoNotCall.gov. Many mortgage companies buy “trigger” leads, so once you apply with one mortgage lender, the notification that that inquiry has been made gets sent to companies who pay for that data, and you’ll be fighting spam calls and emails if you haven’t registered with these two websites. Clients have reported being bombarded with as many as 45 calls in a 24-hour period.
There are countless articles about what you can do to raise your score, but here’s what I recommend: Keep it simple. Don’t get in a lot of debt. When you do use debt, do so responsibly. Despite common advice to use multiple different types of credit, I personally only have one debt: a single credit card that I pay in full every month. If I were getting a mortgage, my credit score would be 803. Once a year, I buy a credit report from myFICO.com, and check my scores and the data used in generating my score. I make sure everything looks good—and then I get on with my life.
Crystal Flores is a mortgage broker in Texas. She’s a graduate of Dartmouth’s Tuck School of Business and has advised clients on debt since 2004. In her spare time, she tends to her three horses, four chickens, three miniature goats, three cats and a dog. Going to the feed store—and using her sole credit card there—is one of her major pastimes.
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Great article! I’ve heard that after I retire from the military my annual pension (about $91k in today’s dollars, plus annual COLA) doesn’t count as “income” for purposes of applying for a mortgage, and therefore I could have quite a headache if/when I desire to take out a mortgage in retirement. Is that true, is there a workaround, and/or does it also matter or help if I have a large nest egg as well? It makes me wonder if I should apply for the mortgage while I’m still on active duty during my last few months when I still have a regular income prior to being on pension.
This article is a public service that should be required reading for borrowers.
Personally I view credit scores as a marketing tool, not a credit rating. Long before I shut off the junk mail flow, I noticed a correlation between my credit score and the number of credit card offers I received; the higher the score, the more offers. How interesting that credit scores drop when you close credit card accounts.
This is all great info that I need to pass on to kids.
Except I wonder about the last point about opting out of calls. Have things changed in the last twenty years when we last got a mortgage? I registered online that we were looking for a loan and the phone started ringing. Within a few hours I fielded many calls and got companies to bid against each other. We ended up with a rock bottom fixed rate. So I’m suggesting that getting spam may be a useful tool; it certainly was for us two decades ago. Yes, the calls kept coming, but eventually they stopped.
Your article made me curious, so I just looked up my credit score on three sites: Amex (FICO), Chase (VantageScore), and our credit union (also VantageScore). All three scores were different, though the two VantageScores were just two points apart. The FICO score was more than 25 points higher than the VantageScore. Weird.
I’ve also learned that having more credit cards, especially if I keep older ones, has raised my score. The age of the credit line matters a bit, as does overall credit utilization (and more credit cards means higher overall credit available, so if you pay them off every month, your credit utilization percentage will be fantastic). As I’ve written here, I use credit cards primarily for travel benefits, not to raise my score for having more cards. It’s just interesting to me that having MORE cards somehow makes me a better credit risk. Seems counterintuitive, but there it is.
One reminder: if your credit is frozen (which everyone’s should be most of the time!) then you will need to temporarily thaw your credit at the three main bureaus when checking your score.
Crystal, thanks for a great article. Coming from an industry insider, it’s especially valuable.
We’re retired, our mortgage was paid off long ago, and we no longer incur debt. But I discovered one place where my credit rating still matters (for some reason they didn’t even ask about my wife’s): our home and auto insurance premiums. I wrote about it a while back here: Credit Where It’s Due – HumbleDollar
I took your advice to heart Andrew and have previously reached out to my insurance agent about my credit score after reading your initial article on Humble Dollar. Per my agent the company I am insured with does not use credit scores ( at least for me) as a factor in setting my car or home insurance rates. My guess is the factors that determine your individual rates may depend on who you have chosen as your insurance company. I appreciate the article above and your initial article.
I have thought about requesting a higher credit limit on the card we use most of the time to lower the credit utilization percentage but have not done so due to being lazy on this issue. On occasion I have early paid a credit card before the end of the monthly credit card end date as I suspect that the end of the period is when the credit card companies report my balance and credit limit to the reporting reporting agencies.
On your last point, my understanding is that it is indeed the balance as of the statement date that gets reported to the credit bureaus. That’s why, if I have a month with especially high charges — such as this month, when I ordered the floor and backsplash tiles for our kitchen remodeling — I try to pay off most of the balance before the statement date.
Appreciate both Crystal’s article and the reminder of yours. I had meant to ask our insurance provider about this and never did. Back on the list…
Crystal, thanks for an interesting and informative article. I’ve never been able to decode how the various entities use credit scores.
Crystal or others,
So here’s what I don’t understand about our personal scores. My wife and I are well into our 70’s, zero debt, 4 major credit cards paid off monthly, never a late payment, net worth almost 4m, yet our FICO score bounces on either side of 800 within about a 50 point range (780-830) every month or so.
The only thing I’ve been able to see that seems to affect it is when we put a large purchase ($5,000 or more) on a credit card, our score often drops, but then when paid off on time, it goes back up. This has been going on for years (decades?). Our total credit limit on the four major cards is $77,500. Seems like they’d figure out that we’re a pretty reliable risk and our score would settle into a very narrow range.
Not a problem, just curious.
Great article by the way!
Thanks to all who chimed in!
You raise a good point and have never thought if net worth even comes into play for a FICO score.
Jonathan is correct: your net worth does not directly affect your FICO score. It is not a factor in the algorithms used to derive scores. Only debt data: the amount and type of debt that you have, as well as payment history, and the number and frequency of inquiries into your credit report, are used in scoring. Skipped or late child support payments will also be reported on a credit report, and that activity will affect a score. Medical collections are also reported, but those are a complicated topic in regards to how they affect scoring.
The answer is, it doesn’t–at least not directly.
I echo Jonathan’s comments below. The movement in your score is a reflection of the fluctuating balances in your revolving debt. Honestly, I wouldn’t sweat this too much….if your score is bumping between 780-830, that’s high enough that you’re going to get the best rates on almost any debt (auto loan, mortgage, etc.) you’d shop for, but remember….if you don’t need to shop for debt, your credit score isn’t very important.
And by the way, the FICO model 10T that’s coming will assist borrowers like you. It’s going to give lenders a “video” of how consumers use credit.
Yes, what you’re seeing is the impact of your credit card utilization — how much of your credit limit you’re using. In my experience, if you only have revolving debt (i.e. credit cards) and not installment debt (i.e. car and home loans), it’s awfully hard to get a credit score much above 820.
I have the same question while in a similar situation.
Thanks for an interesting article, I wasn’t aware of the multiple scores. I am, I think, in the happy position of not needing to care about my score. Next month I move to a retirement community where I expect to spend the rest of my life and which has already vetted my finances. I will pay cash for my next car. I already have multiple credit cards. I suppose my insurance rates might go up a bit, but they are low to start with. I think my current score is around 820, so presumably it has room to fall if I did need it.
Informative and helpful information for those in the market.
I find the angst over mortgages interesting though. I bought a house in 1970 with a rate of 9-1/2% and 20% required down payment. Another in 1975 at about the same and in 1987 at 9-3/4% with 15% down. In the early 1980s rates were much higher in double digits.
Compared to then, todays rates seem mundane and you need less down payment as well. True, prices are out of control, but who keeps bidding them up and committing to houses they may not be able to afford and in many cases don’t actually need.
In 1987 I apparently bought at the peak because I was underwater for nearly ten years and couldn’t refinance as rates dropped. I bought the house for $159,000 and this week I received a tax bill and the house is assessed at $704,000 and they don’t know about all the remodeling we’ve done.
I wonder if we are setting ourselves up for a new housing crisis, especially with what seems low down payments in many cases.
I’ll bet it will be hard for anyone to beat our first mortgage interest rate. In 1984 we bought our first house in PA for 52K with an interest rate of 13.5%.
A year later after our daughter was born decided to move back to our home state of NH and was lucky to find a very modest ranch on 1/5 of acre for under 80K, but don’t remember the interest rate. most house in the area were going for over 100K and as Dick mentions they were under water for years.
Because we did not over spend on the second house we’re able to buy our third house (the one our children grew up in and we owned for 22 years) when the markets were favorable.
Regarding your first paragraph ‘challenge’: My wife and I bought our first home in Queens, NY, for $79,000 closing May 1981. Shopping for best mortgage via phone, on the advice of our well informed real estate attorney, we settled on 3 year ARM at 16.75% at Citibank. That was after a 0.25% reduction on the loan for moving our banking to Citibank, and yes we paid points to get that rate. Thankfully, rates dropped in the ensuing years; however, our rate drop was 3% (to 13.75%) after 3 years per loan agreement. On the flip-side it would ‘only’ rise by 3% at the next 3 year period if rates went thru the roof.
I came across the closing paperwork while downsizing / decluttering for my latest move.
Funny part was when I showed that paperwork to a real estate agent, she said 6 – 7% is not bad; I pointed out that is 16.75%, she was speechless. I went with a more mature and seasoned agent.
I bought the house I sold last year in 1989 with a 10% down payment and a 30-year mortgage at 10.5%. I had a builder buy down of two points the first year and one the second. Then I refinanced for 15 years at (I think) 7.75% and paid it off in 11 or 12 years total. So I have been a little amused about the angst when rates reached 5% or so.
You’ve made an important point. Consumers have short memories and often big appetites when it comes to housing choices. Most don’t remember a time when rates were higher than 5ish%, and many houses sold today are luxury homes as compared to their more modest homes of the 70s and 80s. And yes, even as a professional in the industry, I worry that we are setting ourselves up for another housing crisis….many factors play into my opinion on that topic. It may not be a dramatic crash, but a slow stumble. But honestly, that’s a topic for another article.
I think one of the causes of the housing crisis of 2008 that gets little attention was mortgage companies pushing interest only loans that people with little financial education jumped at. As my wife will tell you I was railing against this criminal practice long before the crash!
We want that article!!
Thank you for the explanation. Buying a house right now does sound like an intimidating project!