Credit is a crucial part of the loan approval process and can greatly affect your loan approval, rate, and more. There is a lot to know about credit and the more knowledge you have on the topic the more you can help yourself when it comes to getting a loan.
Credit scores range from 350-850. Leader Bank requires a 620 to approve a loan and a 740 is considered in the top tier. In some cases certain products might get a better rate for 780 or even 800 scores considered “ultra-premium” and could result in a .125% better rate than a 740 but generally speaking 740 is the top tier.
Credit is a key item in getting a home loan for several reasons. Our automated loan approval systems which are run when a loan is submitted and again during underwriting use credit to determine if there should be an approval. That’s an important component in the approval process for your loan. You need a 620 credit score to be able to apply (at Leader Bank) as a minimum score. Your score will also impact your rate and your PMI (private mortgage insurance) which is an added cost for buyers with less than 20% down payment. The credit score can have a drastic effect on these items – for example a 660 credit score buyer might get a rate that is .75% higher than someone with a 740 credit score which can account for several hundred dollars per month increase. So credit can affect not only your ability to get approved but also the rate, and payment for which you are approved.
Not so fast. Many people will tell me during the pre-approval process they know their credit scores because they check credit karma or their credit card company tells them the score or they just bought a car. Unfortunately and I’ve never understood this – there are SEVERAL credit scoring models and all have different scoring systems. Credit Karma, your local car dealer, your credit card free credit report analyzer are all different scores than what banks or mortgage companies use. Sometimes our scores are higher and sometimes our scores a lower – and it can be drastic. I’ve had a 30 or 40 point increase or decrease from what customers have told me they just obtained. Here is a fantastic article explaining just how many scoring systems there really are out there and why it’s so hard to figure out which score is the real score.
For our purposes there are 3 scores we care about. Experian, Equifax, and Transunion. And we will use the middle of the 3 for each borrower as our determining score for rates, pmi, and decisioning. If there are multiple borrowers on the loan – we use the LOWER of the middle scores for all borrowers. So if one borrower has a 740, and another borrower has a 660, we will use the 660 as the mid score for the loan.
Usually – yes. Credit scoring is a system that can be manipulated and is a constantly changing system. When we pull credit for a prospective borrower – our credit model provides a how-to or what-if analyzer to tell us if there is an opportunity to boost our customer’s scores. It’ll give very specific instructions saying something like “pay down borrowers bank of America credit card by $635 and rescore for an 18 point increase” and if the steps are followed closely we are able to get a new score within 5-7 days typically which can then be used for an improved rate or reduced mortgage insurance cost. IF the score is far below the 620 minimum, I’ll typically refer customers to a credit repair company I’ve used for the past 10 years who have helped getting borrowers from the 4’s and 5’s into the 7’s in a reasonable amount of time for a reasonable fee.
This is tricky. Credit history is a key part of the loan approval process. There are a FEW programs we can possibly do with no credit history but it is very limiting. If you currently have no credit – it behooves you to get a few credit cards as quickly as possible and use them lightly making sure to pay them down every month. If you are having trouble getting credit because you have no history there are certain cards that are made for people with no credit history- just google “credit cards for people with no credit history”.
For the most part – yes. The rate will reflect the lower score compared to someone with top credit. There are however first time homebuyer programs that have no adjustments for anyone with a score as low as 680 compared to a 740. So those programs are the preferred choice – for first time buyers – if your score is at least 680. In these cases you will get the same rate as a top tier credit buyer. Additionally government loans such as FHA and VA for the most part do not have adjustments to rate for lower scores (though in some cases they do).
Yes and no. There are hard credit inquiries and soft credit inquiries. Hard credit will ding your score – a little – and is usually required for a pre-approval. That allows us to get your scores and see all the debts you have. A soft inquiry on the other hand usually happens right before closing as a comparison tool to make sure you haven’t obtained any new debt that we don’t know about right before closing. A hard inquiry can ding your score slightly but it is not dramatic and it’s not permanent. Your score should recover in the months shortly after the pull as long as you are not doing anything that keeps your scores moving in a downward fashion. Also – the scoring systems have factored in an allowance for credit pulls realizing if someone pulls the credit it’s likely they might be shopping for products and you are allowed a 45 day window of pulls without getting hit each time.
Chris Butts is a Loan Originator and Sales Manager at Leader Bank. He has been in the mortgage industry for over 15 years and is committed to providing his customers with the highest quality service. His extensive experience and knowledge allow him to effectively and consistently help his customers during the loan process, whether it’s a first time home buyer, a refinance or purchasing a dream home.Learn More About Chris
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