This month, we've put together a list of credit score FAQs, including how credit score calculations differ for mortgages compared to other types of loans. As always, don't hesitate to reach out to one of our Mortgage Loan Officers if you have questions or would like more information.
How will my credit score affect my interest rate?
Broadly speaking, a higher credit score means you’ll be eligible for a lower interest rate on your home. Additionally, your credit score can impact the types of loans available to you. There are lots of variables to consider, and each situation is unique. Your Mortgage Loan Officer will assess your overall financial picture and guide you through the process.
How is my credit score calculated?
Your credit score is calculated by credit agencies and provided to your lender when they pull your credit report. There are five categories that make up your score, and some are weighted more heavily, such as payment history and credit usage. You may see variance in your score based on the credit reporting agency and scoring models used. Different bureaus (Equifax, TransUnion, and Experian) and different scoring models (FICO, VantageScore, Equifax, etc.) evaluate data points with different weights. The example below is from myFICO.com.
- Payment History: 40%
Your account payment information, including any delinquencies and public records. - Credit Usage: 23%
How much you owe on your accounts. The amount of available credit you’re using on revolving accounts is heavily weighted. - Credit Age: 21%
How long ago you opened accounts and time since account activity. - Account Mix: 11%
The mix of accounts you have, such as revolving and installment. - Inquiries: 5%
The number of recently opened credit accounts and credit inquiries.
Are there differences between how credit scores are calculated for mortgage lending compared to other types of lending?
Yes. Mortgage lenders commonly obtain scores from all three bureaus and use the middle score (or the lower middle score for joint borrowers, depending on underwriting requirements). For that reason, the mortgage score used is often different from the score consumers see through their credit card or banking apps.
Does having my credit pulled for a mortgage transaction negatively impact my credit score?
When you apply for a mortgage, the lender performs a hard credit inquiry. A hard inquiry can cause a small, temporary drop in your credit score, often around a few points depending on your overall credit profile.
The good news is that credit scoring models generally recognize that consumers shop around for a mortgage. Multiple mortgage-related inquiries made within a relatively short rate-shopping window are typically treated as one inquiry for scoring purposes.
How can I improve my score?
- Lower your credit card balances
Try to keep your credit utilization (the percentage of available credit you're using) below 30%. Lower is generally better. For example, if your total credit limit is $10,000, aim to keep balances under $3,000. Bonus tip: Avoid applying for new credit accounts during your home search (unless necessary), as recent applications can negatively affect your score.
- Pay bills on time
Set up automatic payments or reminders so you never miss a due date. If you're behind on any accounts, bring them current before you start your home search.
- Review your credit reports for errors
Check your credit reports regularly and dispute any inaccuracies, such as incorrect late payments, balances, or accounts that don't belong to you. Correcting errors can help ensure your score accurately reflects your credit history.
Where can I learn more about credit scores?
GreenState offers free credit monitoring tools for members within Online Banking.