How your credit score affects your mortgage

One of the most common topics customers ask me about is credit scores. “How will my credit score affect my rates? What if my partner or spouse has a low credit score? Will applying for a pre-approval hurt my score?” Here’s a roundup of the guidance I give them.

A higher credit score means more favorable rates

Basically, your credit score helps lenders evaluate your ability to pay back your loans, based on your borrowing history. The higher your credit score, the better rates you’ll be able to get, which can lead to significant savings over the life of your mortgage. Your credit score also affects your pricing for mortgage insurance, which is required if you make a down payment less than 20%.

Note: Each of the three major credit bureaus (Transunion, Experian, Equifax) uses slightly different calculations to determine the credit score they give you. On top of that, each of those bureaus have several versions of credit scores. It can be a bit confusing, but at the end of the day the same basic factors affect all of your credit scores, so I encourage customers not to worry too much about each individual one.

Our basic pre-approval includes a soft credit check

Knowing your credit score helps us make more accurate calculations. When you apply online for our 3-minute basic pre-approval, we’ll ask for your social security number and do a secure “soft” credit check, which doesn’t affect your credit score in any way (we use your FICO Classic 04 credit score from Transunion).

Benefits of our basic pre-approval and soft credit check:

• Doesn’t affect your credit score
• Shows you your score, so you know what we know
• Gives us a precise monthly debt calculation
• Helps us calculate a more precise number for what you can borrow
• Allows us to quickly run different financing options with you over the phone
  

Reminder: Our basic pre-approval letter is great for people looking for a rough estimate of what they could be approved to borrow. It’s a good first step if you are just starting to think about shopping for a home or dropping by a few open houses. (Note: Not all pre-approvals are created equal, so if you’re working with another lender, ask.)

Our verified pre-approval requires a hard credit check

If you’re planning to make an offer on a home soon (especially in a competitive market), we encourage you to get our verified pre-approval letter. It’s more thorough than our basic letter and will give you an amount we’re confident we can lend to you. Our underwriting team will review documents like your tax returns, W2s, and paystubs to determine exactly how much you are qualified to borrow, helping your offer stand out by signaling certainty to the seller.

The verified pre-approval process requires a “hard” credit check (we use the median score from Transunion, Experian, and Equifax). This signifies to credit bureaus that you are interested in opening a new line of credit, and will have a small impact on your credit score (usually less than five points).

Benefits of our verified pre-approval and hard credit check:

• Know exactly how much you’re qualified to borrow
• Compete with cash buyers in a competitive market
• Get a head start on the underwriting process and speed up closing
• Usually less than five point impact on your credit score
• Switching to Better Mortgage within 30 days of another lender’s credit check won’t impact your score

Frequently asked: how multiple credit checks work

The good news is that if you are shopping around with different lenders, credit bureaus will typically only dock your score once within a 30-day period, no matter how many mortgage lenders do a credit check. That means if you’ve already gotten pre-approved with another lender but want to switch to Better Mortgage, getting a verified pre-approval or mortgage with us won’t impact your score again.

Keep in mind that even after you’ve been pre-approved, all lenders are required to do another hard credit check during the formal underwriting process, before they close your loan. So, if you don’t plan on applying for a mortgage within 30 days, we recommend getting a basic pre-approval for now (which doesn’t affect your score), and upgrading to a verified pre-approval once you’re ready to start shopping.

That said, I encourage borrowers not to sweat it too much if they do end up needing another hard credit check outside of the 30-day window. The impact to your credit score is relatively small.

Applying with a co-borrower

For our basic pre-approval, we do a soft credit check and use the lower of your two scores. For our verified pre-approval, we do a hard credit check from all three major credit bureaus and use the median of the three scores received, then use the lower score of the two borrowers.

Tip: If one co-borrower has a low credit score, we often recommend that only the borrower with the higher credit score apply to get the best terms possible. You’ll still be able to put both names on the title. (Both borrowers may need to apply to improve your debt-to-income ratio).

How to improve your credit score

At Better Mortgage, we can currently provide loans to customers with a credit score of 620 or above (given that other factors like debt-to-income ratio have been satisfied). If you have a lower credit score and a flexible timeline, you may want to wait and try and raise your credit score before applying, so you can qualify for better rates. On the other hand, if rates are low and you already have credit around or above 720, it may be more financially advantageous to take advantage of the low rates rather than waiting to raise your score.

Tip: If you’re still trying to determine your homebuying timeline, you can use our rate tool to see how waiting and making improvements to your credit score could impact the price of your mortgage.

Ways you can improve your credit:

• Keep an eye on your score and correct errors on your credit report. The Federal Trade Commission has information on how you can get one free copy of your credit report from each of the three nationwide credit reporting companies, and how to dispute errors.
• Pay your balances on time. This is the best way to maintain a good credit score over time.
• Keep your credit utilization low. This refers to the ratio of your credit card balances to your total credit limit. Try to keep your utilization below 30% (by either putting less on your credit cards or applying to increase your credit limit on cards you already have). If you do need to use more than 30%, try paying down some of the balance before receiving your monthly credit card statement.
• Consider keeping your oldest accounts open. The longer your credit history, the better.
• Try to limit new credit inquiries. Opening new lines of credit (like an auto loan or credit card) will impact your score for 12-18 months.
• Keep a low credit profile once you’ve applied for a mortgage. All lenders are required to check your credit again before they finalize your loan, so wait until after your loan is fully funded and the keys to your new home are in your hands before increasing your credit utilization, applying for new lines of credit, or closing accounts.

We’re here to answer your questions and help you explore the best possible financing options for you given your situation. Get started by getting our 3-minute basic pre-approval and scheduling a call with one of our Mortgage Experts, who can talk to you about your options.