Updated: 4 days ago
June 6, 2022
Ever wonder why you think you have good credit? However, you still don't qualify to purchase a home.
Well, you might be looking at the wrong credit score.
Now you may be thinking; there are only 3 scores to look at. How can I possibly be looking at the wrong score?
Another mistake you may have made was watching YouTube videos about how you can save money and boost your credit by not paying off old debt because it will "fall off."
While there is truth in this, it's misleading if you are making a home purchase.
You see, not paying off your past debt may not have affected your consumer credit score, but this did nothing for your mortgage lender's credit score.
All that time, you thought you were making serious moves and were on the road to homeownership.
Before you completely throw in the towel, there's still time to adjust to get you ready for your goal.
Here are 3 things you need to know about your credit score before you purchase a home:
Monitor the credit score that lenders use to approve mortgage loans.
Pay off old debt.
Be patient; improving your credit is easier than you think.
Monitor the credit score that lenders use to approve mortgage loans
Now, you may be thinking, "I checked my score on Credit Karma, and my credit is 680 or higher, so I'm good." Think again because this is just a consumer credit score.
There're different credit models for different things you want to purchase. I know as if credit was not hard enough!!!
Ok, so you discovered you have a credit score of 680, and you applied for a home loan only to be told this isn't what the mortgage lender is seeing.
They're seeing a 610, which is not enough credit to get you much of anything, especially if you want a good rate, and you do!
Your first thought is this is some joke. But I am here to tell you this is not a joke, and you both are right about your score.
So here's what's happening.
If you're looking at your consumer score on any of the platforms like Credit Karma or your bank, you're seeing your consumer credit report.
This is great if you are trying to make a smaller purchase, like a car, or get a credit card.
However, there is a different formula that mortgage lenders use to determine your credit score. So what can you do to see what they see?
Invest in My Fico. I said "invest" because it will cost you a monthly fee to see all of your credit scores.
There are 3 different credit scores you get from the 3 credit bureaus, right? Well, it goes deeper than this.
Each lender uses a different credit model to give you a score from these different bureaus (Experian, Equifax, TransUnion).
Related Stories: "What Credit Score Do Mortgage Lenders See?"
For example, your consumer credit report from Credit Karma gives you scores from the 3 bureaus which work for credit card applications. Still, the car dealership uses a different model to determine your credit score.
On top of that, mortgage lenders use a completely different model from both credit card lenders and car dealerships. Tired yet?
So while you're looking at your consumer credit scores based on a certain model, the mortgage lender is looking at your credit score based on the model they use.
Fortunately, MyFico.com allows you to see all these scores. Once you see all these scores, you can focus on what you are trying to accomplish.
Once you can monitor the credit score that mortgage lenders use, you can see the things on your credit report that are affecting that particular credit score.
Pay Off Old Debt
You may have been told, “Don’t pay off old debt,” by a credit repair professional or many YouTube videos discussing how to fix your credit.
They say if you have defaulted on the bill and have not received any contact from the creditor, you can wait them out for 7 years, and the debt will fall off.
But from personal experience, this isn't the best idea.
First, it's not helping your debt-to-income ratio, which is affecting the approval amount you can get for the home you want.
According to Rocket Mortgage author Miranda Crace, the debt-to-income ratio, also called DTI, is a percentage that tells lenders how much money you spend on paying off debts versus how much money you have coming into your household.
Having a low DTI means that you have a good relationship with your finances and spend money wisely.
It tells lenders that if you are given a loan, you'll make your mortgage payment a priority because you're not living above your means.
Second, it still appears as a negative item on your credit history. Old debt will fall off 7 years after the last payment you made on the debt. This will give your consumer score a little boost. However, it will stay on your credit report.
An underwriter is going to view the old debt as a red flag. An underwriter is the last person that will stand in the way of you purchasing your dream home. They take a deep dive into your financial history to determine if approving you for a loan is in the best interest of the financial institution, according to Ashley Kilroy of SmartAsset.
By paying off this debt, not only do you reduce your debt-to-income ratio, but you also let banks know you have a good habit of paying your bills.
You're worth the risk of loaning hundreds of thousands of dollars. It can even build your credit, especially the credit score that mortgage lenders use.
Most importantly, ensure you get a letter of deletion when you negotiate the final payment!