Want To Buy A Home? 3 Things You Need to Know!

Updated: Sep 13

June 6, 2022

 
Guy looking at his cellphone checking his credit while holding his laptop
Feeling confident about your credit score, but are you sure you are looking at that right one?

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's gonna "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 credit score.


All that time you thought you were making serious moves and you were on the road to homeownership.


No worries!


Before you completely throw in the towel, there's still time to make adjustments 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

Young women getting help to understand her credit.
Make sure that you are seeing the same credit score as the mortgage lender.

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 kind of 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, but 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.


Crazy right!?


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.


If you are just trying to get a credit card or a small personal loan then your 680 consumer credit score is perfect, but if you're trying to buy a home your 610 mortgage credit score is not going to cut it.


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

Women explaining why she can not approve a loan
Old unpaid debt may fall off your credit report, but it is still apart of your credit history. This could get your loan application denied!

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 just wait them out for 7 years and the debt will fall off.


But from personal experience, this isn't the best idea.


Here's why.


  • 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, 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's still showing up 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, make sure you get a letter of deletion when you negotiate the final payment!


Be Patient, Improving your credit is easier than you think

Crisp one hundred dollar bill held in a woman's hand
Improving you credit is the best way to get the home loan you deserve.

Now that you know what mortgage lenders are seeing, you know exactly where to strike.


You can take real action!


You'll have to spend money to pay off the old debt. The amount depends on how bad you have let things get.


But make a plan to start paying off your outstanding debt because you won’t regret it.


It is a very hurtful feeling to get to the last part of the home buying process only to be told, “No”!


Remember, as I mentioned before, underwriters take a deeper dive into your credit history. There is no easy, quick fix. The money you give credit repair agents is money you can use to pay off your debt.


They can't erase the credit history that underwriters can see based on the credit model mortgage lenders use. You can dispute inaccurate information but you can not erase what you actually owe.


Once you start paying off your debt, dispute inaccurate information and pay your credit cards on time, your credit score for mortgage lenders will start to rise. Be patient, you'll see!



Major Take Away


With the housing market picking up, owning a home is becoming a reality for so many people. It can become your reality too.


You always want to make sure you're equipped to get the best deal possible, you can start by having the best credit score possible.


Also, remember this is a large amount of money you're asking for, if a mortgage lender is offering you a home loan with bad credit you may be walking into a trap, so beware of lending options that seem too good to be true.








15 views

Recent Posts

See All