Credit Score

The credit score used to qualify your home loan affects several parts of your loan: the interest rate your loan can be locked in at, how expensive your mortgage insurance is (or if you can qualify for mortgage insurance) if you aren’t bringing a 20% down payment to the closing table, how closely or loosely the underwriter looks at your credit history during the process, etc. because your credit score is the most succinct indicator lenders use to determine their risk in lending money – the lower the score, the higher the risk and the higher the risk, the more expensive they’re going to make it for you as a borrower to get their money.

The usual and customary tiers of credit scores are as follows:

740 and up (best rates)
720-739 (better rates)
700-719 (good rates)
680-699 (fair rates)
660-679 (OK rates)
659 and below (Government loans will have the best rates for these scores.)

 

Some lenders and mortgage insurance companies will have slightly different tiers, but this gives you an idea of what your loan officer sees or starts thinking of when they review and analyze your credit report. 

Credit Score Definitions & History

The credit score that we refer to throughout this site and throughout your home loan process is the middle score of a tri-merge credit report that is pulled when you initiate a loan application with your loan officer. 

A tri-merge credit report is one report that lists your accounts, inquiries, and other pertinent payment information that is held with all 3 major credit bureaus – Equifax, Experian & TransUnion.  Each bureau has a different formula they use to analyze your credit history and determine your credit score for that specific bureau. 

The 3 bureaus started out as regional credit reporting entities: TransUnion reported for the Central region of the US, Experian reported for the Western region of the US, and Equifax reported for the South and East regions of the US. 
This is the main reason why you might see different information reporting on your credit report, depending on which bureau’s report you’re looking at. Some creditors (and many debt collection companies) still adhere to these regional divides, so may only report information to one or two of the bureaus instead of all 3 at once. And this is what accounts for one or 2 of your scores on the tri-merge report being vastly different than the others.

This differentiation is also the reason lenders will use the middle score of the 3 scores provided to underwriter you loan to: that middle score is thought to be the best indicator of how you really spend money and pay debts.  

Credit Score Changes

Your credit scores can change from day to day depending on when your creditors decide to report your payment history to the bureaus (they all have a different day of the month or quarter that they report) and a few things will generally, immediately, affect your score:

1. A lot of credit pulls all at once.
This type of activity implies to the bureaus that you’re applying for, and getting rejected for, credit at a lot of places until you find one that approves you – because why would you keep applying for credit if you were approved by a creditor already?

The caveat to this is shopping for a car or home loan. There are specific inquiry codes that show on our credit reports that indicate to the bureaus that the inquiries are for a large purchase, so they’re shopping around and the bureau’s formulas look at the multiple credit pulls with a different eye.

However, that caveat is only good for a few days. As in, if you give permission to 3 lenders to pull credit on one day and another 2 lenders a week later, that pattern may lower your score.

So if you’re intending to shop for rates for your car or home loan, pop your applications in all at the same time if possible to avoid having multiple hits to your score happening over an extended period of time.

2. Late payments.
Wheeeeew! The creditors and bureaus are going to get this onto your report very quickly after the account becomes late and it will drop your score instantly by at least 20 or more points. The further away, time-wise, you are from that late payment, the less impact it has on your credit score.

If the late payment is on an installment or mortgage loan, your score will drop more because those types of accounts are weighted more heavily in the formula that determines your credit score.

This is specifically why all the financial “gurus” hammer the on-time payment ethos home.

3. Paying off a loan or account.
I know this is contradictory and it’s eternally frustrating for all us poors that have it drilled into us that debt is bad and we have to pay it all off to be fiscally savvy, but it is the truth and this truth hurts.

When you pay off and close an account (or the account automatically closes when it’s paid off) the account is removed from the collection of accounts the credit bureau’s formulas use to determine your credit score, which usually lowers your score because it lowers the amount of credit “available**” to you. 

Say you have the following credit profile:

Credit Card 1: credit limit=$1000, current balance=$225
Credit Card 2: credit limit=$7000, current balance=$3550
Car loan: credit limit (this is the starting amount of the loan)=$17,000, current balance=$7600
Student Loan 1: credit limit (the starting amount of the loan)=$24,450, current balance=$10,215
Student Loan 2: credit limit=$15,210, current balance=$13,650

With this credit profile, your total “available” credit is $64,660 (the total of all the credit limits) and your total balances are $35,240, making your credit usage ratio about 54%.

The bureaus like this ratio to be at or under 13% for optimal scoring, but that’s not really tenable for a lot of people. The higher this ratio is, the lower your score will likely be.

The bureaus also like that “available” credit to be as high as possible because it means that lenders like to give you money and there must be a reason why.

Let’s say President Joseph Robinette Biden, Jr. cancels all student loan debt (from my fingies to his pen, friend!).

The above credit profile will remove the 2 student loans and here’s what we’ll have: “Available” credit= $25,000 and total balances are $11,375 making the credit usage ratio 45% but your “available” credit went down by nearly 40% and that is the part of this scenario that will make your score go down.

**I use “available” in quotes in these scenarios because it rare that you can actually access the funds between your credit limit and the balance on the account unless the account we’re talking about is a revolving or credit card account.

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