Mortgage Basics - Credit - Barrett Financial Group, LLC

What’s in Your Credit Report

Three nationwide credit bureaus, Equifax, Experian, and TransUnion, each keep a file on you. They’re separate companies. They don’t have to hold the same information, and they rarely do.

Each file holds four kinds of information:

Identifying details. Name, date of birth, Social Security number, current and former addresses, and employers.
Account history. Every account a creditor reports, with the limit or original amount, the balance, and a month-by-month record of whether you paid on time. This is the biggest part of the file, and it’s what moves your score.
Inquiries. Who has looked at your credit, and why. A hard inquiry from an application you made shows up to lenders for two years and affects your score for one. Soft inquiries, like checking your own report or getting pre-screened offers, don’t.
Public records. Today this mostly means bankruptcies. Tax liens and civil judgments were removed from consumer credit files in 2017 and 2018 and no longer appear.

Most negative information falls off after seven years. A Chapter 7 bankruptcy stays for ten.

Reading Your Own File, Free

You can get your report from each of the three bureaus for free. Since 2020, you can get them every week instead of once a year. Go to AnnualCreditReport.com, the site the three bureaus run together under federal law. It’s free, and it shouldn’t ask for a card number.

The free report shows what’s in your file. It usually won’t show a score. The score you buy or see in your banking app is rarely the one a mortgage underwriter will see.

Pull all three well before you apply, and read them. Errors are common. You might see an account that isn’t yours, a paid-off balance still showing, or a credit limit reported much lower than it is. These errors may affect your credit score. Find them months before you make an offer, while there’s still time to fix them.

How Scoring Works

A credit score is a statistical estimate of how likely you are to fall 90 days behind on an account in the next couple of years. It’s built only from what’s in your report. Credit scores generally do not directly factor in your income, savings, or employment. So someone who earns a lot can still have an average score.

FICO scores, from Fair Isaac Corporation, run from 300 to 850. They’re what mortgage lenders use. VantageScore, created by the three bureaus, uses the same range. It’s a different model, though, and will usually give you a different number. Neither one is wrong. They score the same file with different rules.

Roughly, payment history counts most. Next is how much of your available credit you’re using, then the age of your accounts, then your recent applications and the mix of account types. The exact weights vary by model, and no lender controls them.

The Equal Credit Opportunity Act bans scoring models from using race, color, religion, national origin, sex, marital status, or the fact that income comes from public assistance. Age can be used only in a properly designed model that doesn’t put older applicants at a disadvantage.

What Mortgage Lenders See

Mortgage lenders look at your credit differently than other lenders do. This surprises a lot of people.

Older FICO versions. Fannie Mae, Freddie Mac and the government programs require specific older FICO models. That’s usually not the newest version or the score in your banking app, and yours will usually come in lower.
All three bureaus, then the middle score. A mortgage lender pulls a report from all three bureaus and uses your middle score. It doesn’t use your highest score or the average. If you have two strong scores and one weak one, your middle score will be the lower of the two strong ones.
The lower borrower, on a joint application. When two people apply together, most programs use the lower of the two middle scores.
Shopping for a rate won’t hurt you. Mortgage inquiries within a short window, 14 to 45 days depending on the model, count as one inquiry. You can compare lenders without damaging your score. The models were built to let you do that.

Improving Your Credit Before You Apply

No one can tell you exactly what a change will do to your score. The models are proprietary, and every file reacts differently. These are the things that reliably help:

Pay on time, every time. Payment history counts more than anything else. A single payment 30 days late can cost you a lot of points.
Pay down your balances. What counts is the balance reported compared to the limit, on each card and overall. Paying a card down before the statement closes changes the number a lender sees sooner.
Keep old accounts open. Closing a card you’ve had a long time shortens your history and takes its limit out of the calculation. Both hurt your score.
Don’t open anything new. No new cards, car loans or store financing from the moment you start talking to a lender until the day you close.
Dispute anything that’s wrong with the bureau and with the company that reported it. Both are legally required to investigate.

Give it time. Credit improvements can take time, so talk to a loan officer early. Don’t wait until the week you find a house.

Your Rights Over Your Credit File

The Fair Credit Reporting Act controls what can be kept on file about you. It also says what the bureaus, and the companies that report to them, have to do about it. In summary:

You can see everything in your file, including where the information came from and, in most cases, any medical information in it.
You can see who has requested your report within the past year for most purposes, or two years for employment.
You can dispute anything you believe is incomplete or wrong. Raise it with the bureau and with the company that reported it. Both must investigate, normally within 30 days, and fix or delete anything they can’t verify.
If you’re not satisfied with how the dispute is resolved, you can add a short statement of your own to the file.
You can freeze your file for free with any bureau, and lift the freeze the same way. A freeze stops new creditors from pulling your report, so remember to lift it before you apply.
Most negative entries have to come off after seven years, and a Chapter 7 bankruptcy after ten.

If You’re Turned Down

You have specific rights, and you should use them.

Under the Equal Credit Opportunity Act, a creditor that denies your application has to tell you the specific reasons, or tell you that you can ask for them within 60 days. Vague reasons don’t meet the law. “Insufficient income for the amount requested” is a reason. “You did not meet our standards” isn’t.

Under the Fair Credit Reporting Act, if the decision was based on information in a credit report, the creditor has to name the bureau that supplied it and tell you that the bureau didn’t make the decision. You can then get that report free if you ask within 60 days. You can also get the credit score that was used, along with the main factors that held it down.

A denial isn’t always the end. Sometimes a different program works for the same borrower. Barrett Financial Group works with a network of lending partners, allowing our Loan Originators to explore available mortgage options based on your financial situation and eligibility. If one loan program isn't the right fit, our team can help you review other potential options.