Credit is arguably the single most important factor in your pre-qualification because it controls two critical factors: your credit score and your debt. You can make plenty of money, but if your credit score is too low, you can’t get a loan. Or you may have a great credit score, but you have maxed out all your credit and have too much debt. This is why the first thing every lender wants to do is pull your credit. Without pulling your credit, any conversation about a loan, or a rate is purely hypothetical and truly means nothing. And getting credit pulled is the one thing that people seem to protect the most but know the least about. The reason for this is because credit is incredibly nuanced and there are a lot of deceptive credit monitoring services that provide credit scores so people think they know their credit score when they really don’t. Credit Karma is the most widely used, but it is deceptive, inaccurate, and drives me crazy. It is wonderful for monitoring credit, but I can’t stress how grossly inaccurate it is for providing a true FICO credit score. When someone tells me they have a 640 credit score on Credit Karma, nine times out of ten their actual FICO score is MUCH lower. I see this every single day and have to deliver bad news. Perhaps ten percent of the time, for unknown reasons, their credit score is actually higher. You simply never know until you pull the credit. Here are a few key things to understand about credit in the loan process; especially for pre-qualification.
“Good credit” is relative. Here is a way to think about credit score ranges: anything above a 760 FICO score is A+ credit; 740-759 is A credit; 720-739 is A- credit; 700-719 is B+; 680-699 is B; 660-679 is B-; 640-659 is C+; 620-639 is C credit; anything below a 620 and we need to do some work to get a loan. I can do loans between a 580-619, but only if the Automatic Underwriting System gives you an “approved/eligible” return from Fannie Mae.
If your credit score is below a 680, you are going to take a larger hit on conventional interest rates because you are deemed a higher risk. The better your credit score, the better the rate. But most people are way too rate sensitive; the difference between 1/8th of a point is usually the same amount as a trip to McDonalds. Below a 680 score it might be worth looking at FHA rates because they are lower. Even though the credit score is lower which should indicate more of a lending risk, FHA loans are government backed and you have to pay mortgage insurance, so rates are lower than conventional rates. Plus, most lenders are going to sell your FHA loan to a servicer after it closes so they are just ensuring you meet Fannie Mae lending guidelines. The question is always how do we make your money work best for you? It absolutely does not matter to me what kind of loan you get so it is my job to price out different loan scenarios, provide you options, and let you choose what works best for you and your family. As a general rule, anything above a 620 credit score is golden for FHA. But the way FHA rates work, anything between a 620 and a 680 isn’t necessarily going to get you a better rate. It may help with lender credits, but as long as you have a 620 or better, you don’t need to wait and try to raise your credit score. You’re going to get a really good rate because I have great government lenders.
For a USDA loan, you need a minimum of a 640 credit score. There area few exceptions down to a 620, but it’s tough.
VA loans are special. The bottom line with those is I need to run it through the Automatic Underwriting System. VA loans are given a lot of latitude with credit scores.
If your credit score is below a 580, we’ve got some work to do. You can use whoever you want for credit repair, but you will need to do something. It may take some time, but if you have a goal, it is definitely achievable.
My biggest advice to anyone in regards to credit is PAY YOUR BILLS. Missing just one credit card payment will drop your credit score 50-100 points. And be aware of medical bills. Stay in contact with them; don’t ignore them. I see so many that are sent to collections.