Why You Should Check Your Credit Before Applying for a Mortgage

This article is part of an ongoing series of tutorials on the mortgage shopping and application process. In this lesson, I’ll explain why it’s important to check your credit score before shopping for a mortgage loan.

Let’s start with a basic definition of credit scores and progress from there:

What is a Credit Score?

A credit score is a three-digit number used by lenders to measure risk. Anyone who has ever borrowed and repaid money in the past will likely have a credit score. The scoring system most commonly used by mortgage lenders is the FICO score. This is a three-digit number between 300 and 850.

The score is based on information contained within a consumer’s credit reports. The reports, in turn, are based on information that gets reported by creditors (banks, credit card companies, etc.).

Why are these scores so important to mortgage lenders? In a word, risk.

Mortgage lenders are concerned with the level of risk a borrower brings to the table. It is partly what determines whether or not a particular borrower will be approved or rejected. It also influences the interest rate they assign to each loan. This is referred to as risk-based pricing:

• A borrower who is deemed to be a higher risk will be charged more interest.
• In contrast, a more responsible borrower who is considered to be a lower risk will qualify for a lower interest rate.

This is how your credit score relates to the mortgage-shopping process. Having a high score indicates that you’ve been a responsible borrower in the past. Thus, you represent a lower level of risk for the mortgage lender. As a result, they will probably offer you their best interest rate available. Having a low credit score has the opposite effect. The lender will charge you a higher rate if you have bad credit.

So the credit score ties into mortgage shopping in two ways:

• It will partly determine whether or not you can get approved for a loan in the first place.
• It also partly determines the interest rate you get from the lender.

When it begs the question: What credit score do you need to get approved for a mortgage loan? I’ve addressed this topic in a separate tutorial, so I won’t explore it fully today. In short, most lenders want to see a credit score of 620 or higher. That number is not set in stone, but it’s the closest thing to a “rule of thumb” I can offer. You can refer to the tutorial linked to above for more on this subject.

Check Your Score Before Shopping for a Mortgage

Now you can see why it’s so important to check your credit scores before applying for a home loan. In fact, I recommend that you check them before you even begin the mortgage-shopping process.

You might’ve noticed I said “scores,” in the plural. That’s because you have three of them, one for each of the credit-reporting companies in the United States. You have one score produced by TransUnion, another produced by Equifax, and a third produced by Experian. I recommend that you check all three of them, because you never know which one the lender is going to look at.

Don’t be surprised if you find three different numbers. While the scores may be based on the same information from your credit reports, they are produced by three different companies. It’s actually rare to have the same score across all three of the bureaus. But we’re getting into the weeds here. What I want you to take away from this article is the importance of checking your credit score before you shop for a loan.

Expect to Pay a Small Fee

You can obtain your credit reports for free, and I recommend doing so. The federal government requires the three reporting bureaus (TransUnion, Equifax and Experian) to give each consumer a copy of his or her credit report for free, once per calendar year. The official website for obtaining your free reports is AnnualCreditReport.com.

Your scores are a different matter. You will probably have to pay a small fee to check your credit scores before shopping for a mortgage. The last time I checked mine, I paid around $19 for each one. I obtained them through AnnualCreditReport.com, when I was also requesting my free reports. At the end of that process, I was presented with an offer to check all three scores for a single price. You can also get your scores from MyFICO.com. This website is owned by the company that created the FICO credit-scoring model mentioned earlier.

Summary of Key Points

We’ve covered a lot in this tutorial. So let’s recap some of the key points:

• It’s important to check your credit score before applying for a mortgage loan.
• Lenders use these three-digit numbers to evaluate the level of risk the borrower brings to the deal.
• A low score suggests a pattern of the irresponsible borrowing, and will therefore result in higher interest charges.
• A high score indicates a pattern of responsible credit use, and will help the borrower qualify for a lower interest rate.
• By itself, the credit score has the potential to make or break a mortgage loan. So it’s important for two reasons — loan approval and interest charges.
• By law, you are able to obtain your credit reports for free. But you will probably have to pay a small fee for the scores.

Checking your credit before applying for a mortgage puts you in a better position. For instance, if you have excellent credit, very little debt, and a decent down payment, the lender should offer you their best interest rate. If they don’t, you should be confident in your ability to secure a lower rate elsewhere. But you won’t have this kind of negotiating leverage until you figure out where you stand as a borrower. The credit score is a key piece of that puzzle.