Here are some common misconceptions about credit, credit scores, and credit reports:
1. The best credit score will be used.
If you and a significant other are getting a mortgage together, do not assume that the mortgage company will go with the highest credit score. Instead of choosing the highest score from the three credit institutions, lenders will choose the one that is in the middle. However, if one borrower has a high credit score and also earns a high income, then the lender might assume less risk and be inclined to go with the high credit score. The salary makes the person with the higher score a safer bet.
2. Shopping for lenders can hurt your credit score.
Multiple inquiries about your credit can lower your score. But not all inquiries hold the same weight. FICO allows for rate-shopping by viewing all similar inquiries within the same 30-day period as one inquiry. You can talk with as many lenders as you’d like as long as it happens within 30 calendar days.
You should shop around to get the best interest rate possible. A percentage point can make a big difference over the lifetime of a loan. It is often recommended that you visit at least three lenders before making your final decision.
3. You need clear credit to be able to purchase a house.
Your credit may not be perfect. That doesn’t mean you can’t purchase a home. Conventional loans usually require a score of at least 620. But loans backed by the FHA only need a score of 580 for approval. Besides those options, you could find a co-signer or agree to make a bigger down payment that can help reassure the lender. There are also local state or county programs, and other assistance programs that might help with the purchase.
Your score also determines the interest rate that you’ll pay on a loan. Ask your mortgage advisor how you can get your credit into the best position possible.
4. You can’t have debt and purchase a home.
Debt will affect your ability to buy a house. Most people have some debt, like student loans and car payments. What matters is how much debt you are carrying compared to your income (or, what is known as your debt-to-income ratio).
Your debt-to-income (DTI) ratio is found by taking the total of your recurring monthly debts and dividing it by your total monthly income. To be approved for a loan, your DTI ratio will have to be 36% or less.
If your DTI ratio is too high at the moment, you have two options. You can pay down some of your debts or generate more income. Always talk to your mortgage advisor about which solutions will have the biggest impact.
5. You can’t buy a house with little or no credit history.
While lenders do prefer you to have a solid credit history, some will accept applications from those with little or no credit. Lenders have ways to check out alternative credit sources, so it may be possible to get a loan.
Some of those ways include seeing if you have paid your rent on time, or whether you paid your utility bills regularly, etc. Some lenders will not accept these alternatives, but some lenders will, so be sure to do your homework.
6. You can’t buy a home when you still owe on student loans.
The type of debt doesn’t matter as much as your debt-to-income (DTI) ratio. As long as your DTI meets your mortgage lender’s requirements, you can still get a mortgage and have high student debt. There are even lenders who will roll student loans into mortgages, which might help your overall financial situation. Ask your mortgage advisor if you qualify for this option.
At McLean Mortgage Corporation we are your trusted advisors for all of your mortgage needs. Feel free to contact us with all of your mortgage questions.