November 3, 2020
When you apply for a home loan, whether it’s an FHA mortgage, conventional loan, or any other type of “forward mortgage” used to purchase, your lender is required to check your employment, income, and credit information to make sure you are a good credit risk.
Some borrowers assume the lender is only interested in FICO scores–the numbers assigned to you based on your credit patterns, repayment history, and other variables.
But that is NOT true–the score is important, yes. But it’s not the only factor that goes into loan approval decisions. And it’s key to understand the factors that go into determining your credit score as those factors are of interest to your lender.
TransUnion, one of the “big three” credit reporting agencies, advises consumers that credit scores are determined by using the information found in your credit report and the FICO scores in your report “can change as often as the information in your report changes. ”
Potental borrowers should also know that there’s not a single credit score–TransUnion explains, “…it’s normal to have more than one.”
There are multiple factors that your lender will look at–factors that help determine your FICO score but also helps the lender decide whether you are a good credit risk. Those factors include:
- Payment history;
- Amount of credit owed;
- Credit utilization;
- Length of time credit has been used;
- New credit accounts;
- Credit diversity.
Of the list above, payment history is the most significant factor but you should not neglect any area of the list if you need to repair your credit.
You will want to know these areas of your credit report well. If you have issues with your credit score or if you have late or missed payments showing up in your report within the last 12 months, you will want to submit your home loan application once you have a solid 12 months of on-time payments with no late or missed payments.
Anything less puts your home loan approval at risk. Ask a loan officer about this issue and you’ll get an earful–likely a polite and tactful earful, but don’t expect a lender to consider those who have late payments in the 12 months leading up to the application as good credit risks. It’s worth the wait to delay your application until your payment history is solid.
You can improve your credit without paying a third party for credit repair–you should not pay for things you can do yourself.
Paying for credit monitoring is a different story–you will want to monitor your credit during the planning and saving stages of your mortgage loan to make sure you don’t get errors or evidence of identity theft in your report.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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