The housing market is ramping up, and many people are looking to invest in a home. One of the biggest concerns in the home-buying process is how your credit score impacts your loan. Whether you’re getting a mortgage or have your eyes on your future dream home, here are a few things to consider about how your credit score is impacted and how it affects the long-term cost of your mortgage.
1. There’s a Big Difference Between Having Good and Great Credit.
Your credit score reflects the loan you have access to and its interest rates. Even a slight shift in your score can significantly affect the long-term cost of your mortgage, potentially costing you thousands of dollars in the long run. Here’s an example based on a 30-year fixed loan of 200,000 based on current rates using the interest calculator from myFICO.
Note: All numbers here are for demonstrative purposes only and do not represent an advertisement for available terms. This example is based on a $200,000, 30-year loan and the interest rates as of Jan. 25, 2022. Calculations were made using the MyFico loan savings calculator.
There can be a huge difference between the interest rates of “good” and “excellent” scores. In this example, having a FICO score of 680-699 will give you an APR of 3.595%, resulting in a monthly payment that’s $45 more per month than a credit score of 760-850 with an APR of 3.196%. Over the course of the mortgage, the total interest for an APR of 3.595% is $15,923 more than an APR of 3.196%. Having an excellent credit score would save thousands of dollars in the long run.
Over time, a small difference in your score could bump up your rates and have a major effect on the total interest of your loan. For more information on how your credit score can impact your mortgage, use the interest calculator from myFICO and input your personal information, or give our experienced team a call.
2. Pulling your credit score for a mortgage industry does not have the same negative impact as a credit card or a hard money loan.
People are often concerned with how inquiries will impact their credit scores. Inquiries can remain on your credit report for up to two years, but they typically have a minimal effect.
According to Loan Originator Jonathan Fry, “Oftentimes clients are nervous about having their credit pulled, even though it is necessary. I always advise them that a mortgage inquiry affects your credit differently than a credit inquiry for a credit card or a hard money loan. While those types of credit pulls absolutely can have a negative impact on credit score, the bureaus view mortgage inquiries a little bit differently. In essence, you are applying for credit to spend money rather than receive it, so a mortgage inquiry does not have that same negative impact.”
In most cases, inquiries only have a minor effect on credit scores. Consumer Education Specialist Jennifer White states, “They generally have little or no effect after a few months.”
3. Know Which Score Matters the Most.
Before you jump into the housing market, ensure you know the credit score the mortgage lender pulls. Their results may be different than what you expect.
The FICO score model that a lender uses will differ depending on what you’re borrowing. Auto loans, mortgages, credit card companies, and other borrowing industries have different score models that obtain different information necessary for your loan. According to Credit Expert Gerri Detweiler, one factor affecting these models is risk. “All credit scoring models are trying to predict some type of risk, but how they go about it varies because different lenders are assuming different levels of risk. The risk a lender takes when it makes an auto loan is different than the risk a lender takes when it issues a credit card. Different models can help lenders understand those different types of risk.”
The varying levels of risks are a significant factor contributing to the number of credit score models. Mortgage lenders use the specific credit score models that the Federal Housing Finance Agency dictates. Although there are newer models, currently, these are the industry standard.
Equifax Beacon® 5.0;
Experian®/Fair Isaac Risk Model V2SM
TransUnion FICO® Risk Score, Classic 04
Because of the varying credit score models, the score you obtained through your credit card company may differ from what your mortgage lender pulls. One option to get a credit score based on the models used by mortgage lenders is from myFICO.com. Know that your score may adjust between when you check it and when your lender checks it. According to Certified Mortgage Advisor Kyle Seagraves, “The only way that you get exactly what the actual mortgage [credit score] is going to be is to have that hard pull done by a lender.”
If you are still unsure how your credit score affects your mortgage, talk to a professional! Our experienced loan originators would be happy to assist you and personally answer any questions you may have. Please call us at (480) 443-9090, and we will direct you to one of our qualified team members.