How Credit Checks Work When You’re Buying a Home
Credit is a big component of getting a mortgage.
So, let’s talk about some common questions that people have when it comes to this part of the loan process.
When a lender pulls credit, they’re pulling three credit scores: one each from TransUnion, Experian, and equifax.
And what lenders will do is use the average of those scores as the basis of your loan. If there are two or more borrowers, lenders will use the lower middle score between the borrowers to establish things like rate and, if needed, mortgage insurance.
It’s important to remember that there are many, many credit models. So, the main standard is what's called the FICO model and even under the FICO model, there are different versions.
It’s like soda. So, you can have coke, pepsi, or even a generic version and the formula for each one is going to be slightly different. Similar, but different.
And that’s how the scores from each of the three credit bureaus work. So although there are many different credit models such as vantage score, FICO 8, the ones that lenders use are primarily FICO 2, 4 and 5.
The primary factors that contribute to your credit score are going to be any debts that you have, student loans, credit cards, cars, mortgages, any kind of personal loans, if you have ever gone through bankruptcy or a foreclosure or back taxes or a collection.
Events from the last 7 years have the biggest impact on your credit score.
For the models that lenders use, medical collections do factor in. How much they matter does depend on the length of time that the incident as well as the loan type that you are getting.
Usually, if you have had a pretty vanilla credit history, nothing has ever happened, you've had it for a while, you pay your bills on time, your credit card balances are low, the scores are going to be pretty typical.
But if you have older, derogatory credit, meaning missed payments or even something like a medical bill, those do factor in for the FICO 2,4 and 5 that lenders use versus the vantage score and FICO 8.
Typically, an inquiry is only going to impact your score somewhere between about 2-4 points.
So, it is an important diagnostic tool that we need in order to give you the feedback that you want.
If you’ve had your credit pulled for a mortgage, you then have what's called a 45-day shopping window. Meaning if you go to any other lender and have your credit pulled within that time period, it is not going to hit your score as an inquiry.
So although credit is complex, remember lenders do this every day.
For a free consultation, you can contact my team by emailing (email@example.com) or finding me on Instagram (@the.mortgage.mentor).