Home Loan Guidance Topics

Commit to Understanding How Important Credit Scores and Credit Reports are to Home Loans


Your credit status is based on a sliding scale, not pass/fail

There are credit reports and there are credit scores. There is a big difference between having a clean credit report and having a high credit score. Both are good, but one doesn't necessarily create the other. A clean report will lead to qualification and lower interest rates, but a great credit score matters also.

Success isn't about simply qualifying to get a home loan, it's about getting the cheapest loan possible. It's not enough to think pass/fail in your credit score. We have heard people say, "I have very good credit, I don't have to worry about my score" as if the credit score was either good or bad, pass or fail. The truth is that a really high credit score could get you a much cheaper loan than just a clean report. A little improvement in credit score can go a long way in lowering your home loan costs.

Different lenders have different credit score requirements depending on the type of loan you are getting. We talked with many professionals who said that a credit score of 700 was reasonable. Meanwhile, another lender required a 720 to get its most favorable interest rates.

The higher your score, the cheaper your loan

Higher credit scores can speed underwriting time. "Underwriting" is the process in which the lender basically audits all of your paperwork, examines your job, salary, and assets, and determines your riskiness as a borrower. Excess underwriting time can indirectly increase the cost of the loan. Loans that can be processed faster can justify lower interest rates and closing fees.

Higher credit scores can also reduce the mortgage professionals' time. They hate spending countless hours working on a loan only to find that you aren't creditworthy. The credit score and credit reports are the first things the mortgage professionals check on you. If you have high scores, the loan professionals may believe that getting you a loan will be a breeze. They may "price" the loan lower in light of this. If they see lower scores and problems in your credit report, they may expect that your loan will be a pain to process, pricing the interest rate on your loan higher so that they make more commission for their extra time.

Higher credit scores can mean less paperwork for you and therefore less effort on your part in the loan process, saving you time to do other things to reduce home loan costs. If you have a high credit score, the underwriters may feel comfortable with less documentation. Lower scores and they will want to do much more auditing of your fileŠof your life. The less time you spend with credit issues during the loan process, the more time you can spend doing other things to lower your cost of home ownership. Time spent on your credit profile prior to meeting with the mortgage loan officers is time well-spent.

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