Question: We plan to buy a home soon. How does my credit report impact my loan approval?
Answer: Your credit report should always be a top priority because it impacts every credit purchase; be it a car, computer or property. By Federal law, we are all given a free credit report from all three credit report bureaus annually (Equifax, Experian and TransUnion). To check yours, go to: www.annualcreditreport.com.
Mortgage lenders use their own formula to determine loan approval. Your score with the three primary credit reporting bureaus listed above may vary because their criteria is slightly different and not all of them receive the identical information. Meaning that some banks don’t report to all three. But all three bureaus use the FICO score. FICO (Fair, Isaac and Company) is a company established in 1956 by Mathematician Earl Isaac and Engineer, Bill Fair to determine a person’s credit worthiness.
Your lender is part of your buying Team: Realtor, Lender, Escrow Officer, Appraiser, Home Inspector – all working for you and your home purchase. A lender will obtain your score from all three agencies and use the middle range score. 33% of your loan approval is based on your debt as it relates to your income. One criteria they look at is the percentage of current debt on your credit cards. They don’t want to see more than 20% debt of your available credit. So, if you have $10,000 available credit, that would be $2,000.00. Anything over that will likely be questioned. The lender will remind you not to make any major purchases during the loan period – which is until your escrow closes. Don’t buy new appliances or a car on credit during the process – or ideally within a few months prior to embarking on a home purchase. Keep in mind that the Lender will be checking your credit report periodically throughout the purchase transaction; they will be aware of any purchases you have made that could impact your ability to get a loan.
35 percent of your approval is based on your on-time payment of bills. The lender wants to see that the borrower is responsible in their payment history. Even one late-pay can influence your credibility.
You may not be aware of this but if you have co-signed on a car or other loan for a family member or friend, the amount you co-signed for will appear as your debt for the full balance. If your FICO score is quite high, this may not be an issue for you; but, if not, it could impact your loan approval.
Before a Buyer can make an offer, they must speak to a lender to be pre-qualified to borrow. When you’re working on that paperwork, ask where you stand and what their criteria is. Heed their advice.
So, yes. Your credit report and FICO score has a lot to do with obtaining a loan to purchase a home.
Thanks to Kathy Zitlow’s Continuing Education class for this valuable information from a lender’s viewpoint. Next month we’ll talk about guarding your credit.
