When you apply for a mortgage, you know that they pull your credit, but what do they look for? Are they looking at the credit score or something else? This is something important to understand so that you can be fully aware of what is going on when you try to obtain a mortgage. The credit score is not the only factor when you are trying to borrow money – your history over a period of time is typically what a lender will look at after ensuring that your score meets the minimum requirements.
The Credit Score
Your credit score can change regularly, typically monthly. It is dependent on different factors including the amount of money you took out of your available credit that month, which changes your utilization ratio; the timeliness of your payments that month; and any inquiries you may have had for new loans or credit cards you applied for during that time. The score might or might not change depending on when you did these things and how drastic the changes were. For example, if you have an available credit line of $5,000 and you maxed out that line to $4,999, your utilization ratio is very high because the entire line is used up. This will negatively affect your score. On the other hand, if you have the same credit line available, but you only charged $100-$200, the utilization ratio is much lower and it might not affect your score.
There are numerous factors that will change your credit score; there is no way to predict what they will do. Of course, it goes without saying, any type of negative behaviors, such as not making your payments on time or stretching your credit limit thin will harm your credit, but just how much you will not likely know. Staying on top of your credit score can help you know when you need to make adjustments, such as paying down your outstanding credit or getting on track with your monthly payments.
The Credit History
The credit history is a bit more complicated. This is where the lender goes through each trade line that reports on your credit report one by one. The lender looks for things like:
- Late payments
- Charged off accounts
- Patterns of financial irresponsibility
- Credit limits and how they are used
- Inquiries and how often they are reported
The credit history can tell a lender a lot about your financial life without every talking to you. They will see when you make your mortgage payments late or when you took out your entire credit line. They will also see accounts that you never paid and had to go to collections. They will also see public records including bankruptcies, judgments, and foreclosures. Each of these items will have a bearing on your credit score as well as your ability to get a mortgage in the future.
Make Sure it is Accurate
The most important thing you can do aside from keeping your outstanding credit at a minimum, paying your bills on time, and minimizing the number of credit lines you apply for is making sure your credit is reporting accurately. Typically, companies report things the right way, but we all know that mistakes get made. Maybe you paid a collection off but it is still reporting as outstanding or you never had a late payment on your mortgage, yet it is reporting 30 days late for one month last year. Whatever the case may be, you have the power to get the report corrected. You have to provide the proof that your reporting is incorrect, however, so keeping your bills, canceled checks, and confirmations from online payments will really help you get things in order. Typically, you can go directly to the reporting agency to get the matter fixed rather quickly.
Understanding your credit score and credit history is an important component of getting a mortgage. You cannot assume that your credit is in good standing because you always make your payments on time. If you don’t have enough credit; you have too much credit; or you have too much outstanding, your score might be lower than you anticipated. In addition, lenders can go as far back as a few years ago to see your payment patterns. It is to your benefit to make sure everything is in order before applying for a mortgage in case you need to make your situation a little more attractive for a particular lender.