Know Your Credit During “National Credit Education Month”

With March being National Credit Education Month, how much do you know about your personal credit and its impact on the mortgage you want?

Here are some facts and recent developments every aspiring first-time home buyer or repeat homeowner should know as the spring housing market heats up:

• There’s a good chance your credit score is higher today than a year ago. Recent consumer trends reveal the average U.S. FICO score — the national gold standard for credit scores — reached 711 by late 2020 (higher than the 703 reported before the COVID-19 pandemic). Congressional stimulus payments that consumers put toward paying down debt, combined with accommodation workouts between some borrowers and lenders, are driving this upward trend.
• You have more control over your FICO score than you think. Your FICO is calculated by using your borrower payment history (35 percent), debt amounts owed (30 percent), credit history length (15 percent), new credit accounts (10 percent), and mixture of credit (10 percent). You can improve it by not arbitrarily opening or closing credit accounts, as well as remaining consistent on monthly payment minimums. First-time homebuyers can use shorter-term credit accounts (credit cards, car loans, etc.) to prove they are worthy borrowers for a long-term mortgage.
• Strive for a great FICO score (but not having one won’t kill your homeownership dream). Many borrowers with a “good” or “fair” credit score are still afforded mortgage opportunities. Whether it’s a government-backed program or not, there are many potential choices if you have consistent income and debt-payment history.
• Your FICO score is just one component of getting a mortgage. While it’s not a perfect measure of financial health, it can be influential in determining why you should be allowed to borrow so much money. Your debt-to-income ratio (DTI) is next in line of importance (total monthly debt payments on all loans/credit divided by gross monthly income — before taxes). Lastly, your down-payment amount is essential.
• The VantageScore modeling of your credit may be beneficial. FICO scores have been common for decades, but the VantageScore was developed in 2006 to help mainstream credit find consumers who may be falling through the typical underwriting cracks. This scoring analyzes your payment history, credit depth, credit utilization, debt balances, recent credit applications, and available credit.
• There are three national credit reporting companies (or “credit bureaus”) that keep track of your credit health: Equifax, Experian, and TransUnion. Making sure they have your most updated personal information helps ensure they have the most accurate current and historical picture of your credit. You can dispute information with them if needed, or even check your credit score for FREE once each year.
• Credit bureaus classify a mortgage as an “installment loan.” An installment loan is one you pay off in pre-determined monthly installments to eventually accomplish complete pay-off. A mortgage is like a very long auto loan since it’s 15 – 30 years instead of 5 – 7 years. Installment loans are different than revolving loans (such as a credit card, retailer merchandise card, or home equity line of credit), which lets you borrower any amount you want, up to a cap, every month.

Know when to let a lender do a “hard” credit check versus “soft” credit check. Hard credit inquiries typically lower your FICO score by a minimal amount for a couple of months. They are usually required when applying for a mortgage, and a lender needs your authorization. A soft credit check is usually for background checks (a new employer, etc.). It does not require your personal authorization and won’t lower your FICO score.