Research shows that only 57% of Americans are financially literate. What’s more, financial literacy rates have plummeted 19% over the past decade. Due to this lack of financial literacy, many mortgage lenders receive constant questions about credit scores, credit reports, and the mortgage lending process.
To help close this knowledge gap, the Certified Credit team has answered some frequently asked questions (FAQs) in our Quick Hits Questions video series. By sharing our answers with your applicants, you can quickly bring them up to speed on mortgage basics. Check out our LinkedIn and Youtube to see our expert answer these questions and more.
Note: Stay tuned for Part 2 of this question-and-answer series, where we tackle mortgage lenders’ FAQs for 2024.
Table of Contents
#1 What is a credit report, and what information does it contain?
A credit report is a detailed account of your credit history from the past seven to ten years. You have a credit report from each of the credit bureaus: Experian, Equifax, and TransUnion.
Credit reports contain the following information:
- Your name, birth date, Social Security number, phone numbers, and addresses
- Open and closed credit accounts
- Account open and close dates
- Credit account balances
- Creditor names
- Payment history
- Soft and hard inquiries
Soon, credit reports will also showcase trended data, which provides insight into your borrowing behavior over the past 24 months.
#2 What is the difference between a credit score and a credit report?
While a credit report is a summary of your credit activity, a credit score is a three-digit number between 300 and 850 that predicts how likely you are to make your payments on time. Your credit score is calculated using the information contained in your credit reports.
Having a high credit score can help you qualify for loans and credit cards with better terms, since it shows lenders that you’ve managed your credit responsibly in the past.
#3 Why is my mortgage credit score different than the credit score my credit card provides?
Many mortgage applicants check their credit scores with their credit card providers, only to discover that their lender sees a different score. For example, you may see a 750, while your mortgage lender sees a 733.
Different types of lenders use different credit scoring models. For example, mortgage lenders look at credit scores calculated using mortgage credit scoring models, which differ from the consumer credit scoring models used to generate the scores you have access to.
#4 I see multiple different credit scores and they’re all slightly different. What’s the deal?
Some lenders only report to one or two credit bureaus, causing your credit reports to contain slightly different information. These credit report discrepancies can lead you to have multiple credit scores that vary by a few points.
#5 What is a FICO score, and how is it different from other credit scores?
In the United States, Fair Isaac Corporation (FICO) and VantageScore are the two most common credit scoring companies. It’s estimated that over 90% of top lenders use FICO credit scores. FICO’s credit scoring factors are weighted differently than VantageScore and other credit scoring companies.
#6 What factors affect my FICO credit score?
FICO credit scores are made up of the following factors:
- Payment history – 35%
- Amounts owed – 30%
- Length of credit history – 15%
- New credit inquiries – 10%
- Credit mix – 10%
#7 What is a credit utilization ratio?
Your credit utilization ratio is the amount of your available credit you’re currently using expressed as a percentage. It’s calculated by dividing your amounts owed (your current credit card balances) by your total credit limit (the maximum you can spend using your revolving credit accounts) and multiplying this figure by 100%.
The lower your credit utilization ratio, the better your credit score. With that in mind, you should strive to keep your credit utilization ratio below 30% at all times.
#8 How can I improve my credit score?
You can boost your credit score by following these six steps:
- Pay off any missed payments or collection accounts.
- Make all of your payments on time.
- Maintain a low credit utilization ratio.
- Keep old credit accounts open, rather than closing them, if possible.
- Avoid applying for new credit accounts unnecessarily.
- Use a combination of revolving and installment credit accounts.
Some credit scoring factors will naturally improve with time. For example, many negative marks, such as missed payments or hard inquiries, have less of an impact on your credit score as time goes on. Additionally, all negative marks fall off your credit reports within seven to ten years, giving your credit score a fresh start.
#9 Will checking my credit report hurt my credit score?
Many people believe that checking their credit reports will bring down their credit scores, but this isn’t the case. You can check your credit reports as often as you want without harming your credit score. Doing so will only result in a soft credit inquiry on your credit reports. While hard inquiries can harm your credit score, soft inquiries do not.
Checking your credit reports regularly is a prudent practice—by reviewing your credit reports regularly, you can identify areas for improvement and ensure your credit activity is error-free. To get a copy of your credit reports, you can request one from the credit bureaus or visit AnnualCreditReport.com.
#10 I paid off my loans. Why did my credit score drop?
Many people feel proud once they’ve finally paid off a loan. While it’s certainly worth celebrating, it can paradoxically cause your credit score to decrease. The reason? Paid-off loans are removed from your credit mix calculation. Thus, if you pay off your only installment loan, your credit mix may take a hit.
#11 If I pay off my mortgage early, will it hurt my credit score?
Since mortgages are installment loans, paying them off early can cause your credit score to decrease. The harm to your credit mix will be more pronounced if your mortgage is your only remaining active loan.
While paying off your mortgage early can reduce your credit score, it may still be the right move financially. After all, paying it off early can reduce the amount of interest you pay and provide you with more financial stability if you’re nearing retirement.
#12 Is no credit a good thing or a bad thing?
These days, many organizations check your credit. Lenders, landlords, insurance providers, and employers are just a few examples. If you don’t have any credit, you can’t prove to these organizations that you have a track record of making your payments on time. As a result, they may be less likely to approve your application.
Fortunately, you can establish credit within a few months. If you can’t qualify for a regular credit card or loan, consider applying for a secured credit card or credit-builder loan instead. These tools are designed specifically for people looking to establish credit from scratch.
The sooner you start building your credit, the better!
#13 Can I build credit without a credit card?
To build credit, you need to have at least one active credit account listed under your name. This credit account doesn’t necessarily need to be a credit card—you can also build credit using a loan or line of credit.
With that being said, having a credit card can optimize the “amounts owed” component of your credit score, which is worth 30%. You can establish credit card activity without having any credit by:
- Becoming an authorized user – If you don’t want to apply for a credit card, you can build credit by becoming an authorized user on someone else’s credit card account, such as a parent, sibling, or spouse. As their authorized user, their credit card activity will get reported on your credit reports—you just need to make sure that their credit card provider reports about authorized users to the credit bureaus.
- Applying for a secured credit card – Secured credit cards are much easier to qualify for than regular credit cards. That’s because they require you to make a cash deposit that’s equal to your credit limit, eliminating any risk to your lender. If you miss a payment, your lender can take the money from your deposit. If you make all of your payments on time, you may be able to upgrade your secured credit card into a regular credit card in the future.
#14 Will I always have a credit score?
Before you can generate a credit score, you must have credit activity reported to the credit bureaus for a certain period of time—one month for a VantageScore and six months for a FICO score. Once you’ve established a credit score, you will continue to have one as long as you keep generating credit activity consistently.
#15 I’m deep in debt and have a terrible credit score. What should I do?
If you want to buy a home, you should focus on raising your credit score first. Luckily, paying down your debt is an effective way to boost your credit score and enhance your mortgage eligibility.
#16 Should I start with a realtor or mortgage lender first?
When you’re ready to buy a home, you should consult with a mortgage lender before reaching out to a realtor. This way, you can figure out what size of mortgage you can qualify for and base your housing budget around that figure.
#17 What score do I need to get a mortgage?
Depending on the loan program, you may be able to qualify for a mortgage with a credit score as low as 500. However, most mortgages are given to borrowers with credit scores in the 700s—as of 2022, the median credit score for approved mortgage applicants was 768.
#18 Can I get a mortgage loan or credit card with bad credit?
You may be able to get approved for a mortgage loan or credit card with a low credit score. However, applicants with bad credit often receive less favorable terms, including:
- Higher interest rates
- Larger down payment requirements
- Smaller loan amounts
- Lower credit limits
The good news? If you take proactive steps to improve your credit, you won’t have a bad score forever. Once you’ve raised your credit score, you can refinance your mortgage to receive a better rate or apply for a lower interest rate credit card.
#19 Does my monthly rent payment impact my credit score when I apply for a mortgage?
Some new consumer credit scoring models feature rent payment information. However, mortgage lenders look at credit scores that are calculated using mortgage credit scoring models. These models don’t take into account monthly rent payments.
#20 I’m self-employed. Why do I need 2 years of work history to get a mortgage?
When evaluating your income and employment history, mortgage lenders want to see stability. Traditional employees tend to have stable incomes, due to their fixed salary or hourly wage. In contrast, self-employed individuals’ earnings may fluctuate quite notably from month to month.
For this reason, mortgage lenders like to review at least two years of tax returns to assess the stability of self-employed income. This way, they can ensure that your new mortgage payments won’t put undue pressure on your monthly budget.
#21 Can I still get a mortgage if I have student loans? How does this change the process?
Yes, you can still get a mortgage if you have student loans. You simply need to make sure you have a qualifying credit score and enough income to cover your student loan payments and new mortgage payments. Lenders will look closely at your debt-to-income ratio and cash reserves to see if you can comfortably afford a mortgage while carrying student loans.
#22 What does your mortgage payment include?
Your mortgage payment is made up of the following components:
If you put less than 20% down or enroll in certain loan programs, you may also have to pay private mortgage insurance (PMI).
Just keep in mind that different lenders calculate their mortgage payments differently. For instance, some lenders may charge your taxes separately, rather than bundling them into your monthly mortgage payment.
Enhance Your Borrower Education With Certified Credit
Now that we’ve rapidly reviewed these 22 FAQs, you can pass them on to your borrowers and answer their queries quickly and efficiently. For more educational materials, make sure to check out our blog and resources page.
As a leading mortgage solutions provider, we also provide many advanced products and services at Certified Credit, from credit score improvement tools to affordable credit reports to automated loan manufacturing solutions.
Schedule a credit consultation with our team today to learn how we can support your mortgage lending success.