A Deep Dive Into How Your Credit Report Can Influence Mortgage Lenders Decisions
Lenders base mortgage decisions on several factors. Theyâll look at what youâve written on your application and theyâll consider how youâve dealt with them in the past. But, most of all, theyâll want proof youâre reliable, trustworthy and can actually afford a mortgage.
Any mortgage lender will almost certainly look at your credit report. Checking your current financial situation and borrowing history helps them work out how much theyâd be prepared to lend you, and whether they can trust you to pay it back.
Hereâs what lenders like to see on your credit report, and some tips on putting your best foot forward.
What Can I Do About A Bad Credit Score
Think you have a bad score? Do not stress theres great news: credit history arent static! Your score will change when the info in your credit report modifications. That means you can take control of your financial health now by making changes that will favorably affect your credit score in time. Heres a couple of things anyone can easily do to get going:
Who Is Actually Able To See Soft Inquiries On Your Credit Reports
Soft inquiries will only show up when you personally check your own credit reports . The credit reporting agencies do not disclose information regarding soft inquiries on reports sold to third parties. If a lender, insurance provider, or employer checks your credit report, your soft inquiries will not be displayed.
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What Are The Top Ways To Rebuild Your Credit Score Quickly
A low score is a result of poor credit management, or life events such as divorce or serious illness. Your credit history reflects that you are missing or have missed payments and/or you have too much debt. These two occurrences will make it very hard to earn a high score because they drive about 65% of the points in your credit scores.
The only way to rebuild your credit scores is to address why they are low in the first place. Sounds obvious but youd be surprised how many people take a shot in the dark approach at rebuilding their credit scores. Or, they are guided by misinformation and/or unscrupulous individuals that promise a better credit score in exchange for a fee. Formulating a plan to rebuild your credit scores is not difficult. Heres how to do it:
A Flurry Of Loan Applications
This one wont so much scare lenders as cause them to take a second look at whats going on in your financial life, says Griffin.
For someone whos paying all their bills on time and not carrying balances, a burst of applications could be perfectly innocuous. But for someone whos making minimum payments or late payments, and transferring balances, its a sign of financial stressand a turnoff to lenders.
Inquiries suggest something to lenders, says Creighton. And thats valuable information.
They are the least important factor in credit scores, and the last thing that creditors are going to look at, says Griffin.
Tip:Some types of credit applicationsfor mortgages, car loans or student loansare grouped together and counted as one inquiry by credit scoring formulas. Thats because when it comes to those large purchases, lenders know youll want to shop aroundand thats smart.
While newer scoring formulas group similar loan inquiries together if theyre made within 45 days, older versions only have a 14-day window. And you have no way of knowing which version potential lenders are using. To be safe, keep all inquiries within 14 days.
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What Do Auto Lenders Check On Your Credit Report
When you apply for an auto loan, lenders will perform a credit check on you. Your credit affects whether or not youll be approved for the loan, and the interest rate for the loan. The interest rate and terms of the loan have a major impact on how much you will end up paying overall, so its important that you know where your credit stands BEFORE you apply for an auto loan. When you apply, lenders will look at the following components of your credit file.
Why Is My Mortgage Credit Score So Much Lower
There can be a disconnect between the credit scores you obtain for free and the ones your mortgage lender is using.
Typically banks, credit card companies, and other financial providers will show you a free credit score when you use their service. Also, credit monitoring apps can show free credit scores 24/7.
But the scores you receive from those third-party providers are meant to be educational. Theyll give you a broad understanding of how good your credit is and can help you track overall trends in your creditworthiness. But they arent always totally accurate.
Thats partly because free sites and your credit card companies offer a generic credit score covering a range of credit products.
Mortgage lenders will use a tougher credit scoring model because they need to be extra sure borrowers can pay back large debts.
For example, auto lenders typically use a credit score that better predicts the likelihood that you would default on an auto loan.
Mortgage lenders, on the other hand, are required to use a unique version of the FICO score almost exclusively.
Since mortgage companies loan money on the scale of $100,000 to $1 million, theyre naturally a little stricter when it comes to credit requirements.
Mortgage lenders will use a tougher credit scoring model because they need to be extra sure borrowers can pay back those large debts.
So theres a good chance your lenders scoring model will turn up a different lower score than the one you get from a free site.
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How The Two Credit Scoring Models Affect Your Score
In the old days, banks and other lenders developed their own scorecards to assess the risk of lending to a particular person.
But these scores could vary drastically from one lender to the next, based on an individual loan officers ability to judge risk.
To solve this issue, the Fair Isaac Corporation introduced the first general-purpose credit score in 1989.
Known as the FICO Score, it filters through information in your credit reports to calculate your score.
Since then, the company has expanded to offer 28 unique scores that are optimized for various types of credit card, mortgage, and auto lending decisions.
But FICO is no longer the only player in the game.
The other main credit scoring model youre likely to run into is the VantageScore.
Jeff Richardson, vice president for VantageScore Solutions, says the VantageScore system aimed to expand the number of people who receive credit scores, including college students and recent immigrants, and others who might not have used credit or use it sparingly.
According to VantageScore reports, there were approximately 10.5 billion VantageScores used between June 2017 and June 2018.
Combining Multiple Inquiries For Credit Cards
The shopping around logic that combines multiple inquiries for auto, mortgage, and student loans is not designed to work for credit cards.
With installment loans, even though you may be approved for the loan, you still have the option of choosing whether or not you want to accept the loan and take delivery of the money. You will probably not open all the accounts, so multiple inquiries can be collapsed into one.
Sometimes, however, if you apply for multiple credit cards with the same issuer in a short period of time, you may only end up with one inquiry on some or all of your credit reports. This is not because the issuer is combining the inquiries and only pulling your credit once. Instead, the credit bureaus see that you have multiple inquiries that look exactly the same, because theyre from the same issuer on the same day. Since the credit bureaus want to avoid duplicate information and the inquiries look identical, they may only count one of them.
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How To Access Your Report
You can request a free copy of your credit report from each of three major credit reporting agencies Equifax®, Experian®, and TransUnion® once each year at AnnualCreditReport.com or call toll-free 1-877-322-8228. Youre also entitled to see your credit report within 60 days of being denied credit, or if you are on welfare, unemployed, or your report is inaccurate.
Its a good idea to request a credit report from each of the three credit reporting agencies and to review them carefully, as each one may contain inconsistent information or inaccuracies. If you spot an error, request a dispute form from the agency within 30 days of receiving your report.
How To Get A Credit Report
Youre allowed one free copy of your credit report every year from each of the major credit-reporting agencies we just talked about. But the reports arent automatically mailed to youyou have to ask for them! And since each agency keeps different details on file, its worth checking with all three. If you play your cards right, you can even stagger them so youre getting a free report nearly every quarter.
Now that you know how to get your credit report, well walk you through the four major areas you need to check for any red flags. These could help you spot potential identity theft situations, so listen up!
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How Many Credit Checks Before Closing On A Home
Throughout the approval process, push yourself to maintain your credit while lenders pull it.
Navigating the purchase of a home can be overwhelming for first-time buyers. Lenders require documentation of seemingly every detail of your life before granting a loan. And of course, they will require a credit check.
A question many buyers have is whether a lender pulls your credit more than once during the purchase process. The answer is yes. Lenders pull borrowers credit at the beginning of the approval process, and then again just prior to closing.
Whats In Your Credit History
Your credit history is essentially a record of how youve used credit. This record plays a major role in determining your credit scores and is used by lenders to get a sense of the way youve handled your money and credit obligations over time. Depending on how youve used credit in the past, your credit history may include
- The number of credit cards and loans you have
- The number of payments youve made on time or late
- How long youve had open credit accounts and whether theyre in good standing
Lenders may use the credit history information found in your credit reports to decide if theyll approve you for a financial product, such as a loan or credit card account. And depending on your state, potential employers, insurance companies and rental property owners may also look at your credit reports, so its important to understand what information your reports include and how its presented.
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Lenders Look At More Than Just Your Credit Score
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If you’re in the market for a loan, your credit score is one of the biggest factors that lenders consider, but it’s just the start.
Lenders like to see an applicant’s full financial profile when deciding whether to approve a loan and when setting the interest rate. So when you fill out a loan application, be prepared to share more than just your credit score.
How Many Times Can I Pull My Own Credit Reports Before It Impacts My Credit Score
There is good news. Pulling your own credit report is considered a consumer disclosure request and therefore your scores will never be impacted. In fact, you canget your credit score and credit report card for free right now!. If, however, you are getting your credit reports from a friend at a mortgage company or at an auto dealership your scores will be impacted. The reason is that their credit report access accounts are not setup for consumer disclosure. They are set up as lenders so the hard pull will count against the consumers score.
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What Is A Credit Score
A credit score is a number. It is based on your credit history. But it does not come with your free credit report unless you pay for it.
A high credit score means you have good credit. A low credit score means you have bad credit. Different companies have different scores. Low scores are around 300. High scores are around 700-850.
How To Read Your Credit Report
8 Minute Read | September 03, 2021
By now, you know exactly how we feel about credit scores . But one thing you still need to pay attention to is your credit report. Even if youre debt-free and dont care what big banks and lenders think of you, you cant just ignore your credit report. You still need to check it for errors or signs of fraud at least once a year.
But sifting through these things can be pretty confusing, especially if you dont know how to read your credit report or what kind of red flags to look for. We know it can be a lot to take in. But dont worry! Weve done the heavy lifting so you dont have to. Ready, set, lets walk through everything you need to know about how to read your credit report.
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Consent And Credit Checks
In general, you need to give permission, or your consent, for a business or individual to use your credit report.
In the following provinces a business or individual only needs to tell you that they are checking your credit report:
- Prince Edward Island
Other provinces require written consent to check your credit report. When you sign an application for credit, you allow the lender to access your credit report. Your consent generally lets the lender use your credit report when you first apply for credit. They can also access your credit at any time afterward while your account is open.
In many cases, your consent also lets the lender share information about you with the credit bureaus. This is only the case if the lender approves your application.
Some provincial laws allow government representatives to see parts of your credit report without your consent. This includes judges and police.
How Your Credit Scores Are Made And Why They Matter
Since there are few numbers that matter as much to your financial well-being as your credit score, it helps to know what your scores mean and how they work.
First, know that theres a big difference between a credit report and a credit score.
- Your credit report is a record of your borrowing history Each loan or line of credit youve opened, dates on those accounts, payment history , and so on. Overall, it shows how reliably you manage and pay back your debts
- Your credit score sums up your credit report in a single number It weighs every item on your credit report to come up with an overall score that sums up how responsible of a borrower you are
The big three credit bureaus Equifax, Transunion, and Experian operate in the realm of credit reporting.
Each one keeps a separate record of your borrowing history, based on the information your creditors send them.
The other players in the game FICO and VantageScore are responsible for credit scoring. They determine your score based on whats included in those credit reports.
For example, keeping your credit utilization ratio low can help your credit scores, while repeatedly neglecting to pay your credit card bills on time can hurt them.
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- Meet you wherever you are in your credit card journey to guide your information search and help you understand your options.
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