Introduction

“When are you going to pull my credit?” This is one of the top questions we hear from our buyers. Many people worry about how a credit check will impact their score but often don’t fully understand what factors influence their credit or how the lending process interacts with their credit profile. Educating yourself on credit scores and how lenders evaluate them can help alleviate these concerns and empower you to make informed decisions.

Many buyers know the weight of a credit score but don't know the behind-the-scenes info when it comes to loans. This blog is aimed to reduce any surprises and provide you with knowledge and for you to feel prepared when applying for one of the biggest purchases in your life. Logistically, we want you to understand how to improve your credit and use it to your advantage to receive better mortgage terms. 

This blog will cover credit score basics, its effect on mortgage rates, how brokers at X2 Mortgage evaluate your score, and tips for improving credit.

 

What Is a Credit Score?

Let’s define it outright–A credit score is a numerical rating (usually between 300-850) that reflects your creditworthiness, or your history of paying money back. 

A credit score is also called a FICO score. Several factors calculate this FICO score (300-850): 

1. Payment history (35%). This is how on time you make your payments. This is the highest calculation, so make your payments on time. 

2. Amounts owed/credit utilization (30%). This is how many accounts you have open. It refers to the total debt you owe compared to the amount of credit available to you across all accounts For example: If you have a $10,000 limit and owe $3,000, your utilization rate is 30%. You want it to be as low as possible.

3. Length of credit history (15%) This one is self-explanatory–how long have you been building credit? The longer, the better. 

4. Credit mix (10%) refers to the variety of credit accounts you have. A diverse mix of credit types shows lenders that you can manage different forms of debt responsibly. There are three types of credit mixes. 

4a. The first is Revolving Credit which is ongoing access to credit up to a set limit, like a credit card

4b. The second is Installment Credit, which are loans with a fixed payment schedule and have set end dates, like mortgages, car loans, and student loans

4c. Finally, there is Open Credit which are accounts that require full payment at the end of each billing cycle (less common but still relevant, like utility accounts, and charge cards. 

 

5. New credit inquiries (10%) make up your score. This is broken down into hard inquiries, and soft inquiries. Hard inquiries are impactful, which means when you apply for a loan for a mortgage or credit card this may temporarily lower your score by a few points. This is what many people are afraid of, but we will go into this later. Medium inquiries usually happen when you apply for an auto loan. Soft Inquiries aren't impactful, and these occur when you check your credit or when a lender has a specific investor that does not require hard inquiries. Soft inquiries do not affect your credit score.

 

Credit Scores and Mortgage Approval

To be approved for a loan, certain loan programs require a minimum credit score. That score is the number they feel comfortable with lending out their money, the number determining the likelihood of the borrower paying the money back. 

For conventional loans, lenders typically require a credit score of 620 or higher. For FHA loans: As low as 500 with a 10% down payment; 580+ for 3.5% down. With the VA loans, No official minimum score is required, but lenders often look for 620+ with other factors involved. Finally, for USDA loans borrowers typically qualify with a 640+.

At X2 Mortgage we have a lot of loans called Non-Qm loans. Many different types of loans have different credit score requirements. You can read more about it here. 

The lower the score, the higher the risk for lenders. Lenders compensate for risk with higher interest rates or stricter terms. Or, if a borrower has very low credit, he may be denied a loan or require a co-signer.

 

How Brokers at X2 Mortgage Evaluate Credit Scores

When applying for a mortgage with X2 Mortgage, our brokers are trained to take a comprehensive approach to evaluating your credit score. While the score itself is important, it’s only one part of the overall assessment. Here’s what we look at:

Credit Score terms per Loan Program

When we are discussing your scenario, we assess whether your score meets the minimum requirements for various loan programs (e.g., conventional, FHA, VA, USDA), and hear about your goals. We never pull your credit score without your consent.

When we do look at your credit report, our team looks beyond the number to understand any late payments, missed payments, or defaults, and help guide you through any adjustments that need to be made. 

Debt-to-Income (DTI) Ratio Consideration

When you are giving your X2 loan officer all of your information, we are starting to paint a picture. This picture involves many different things– your income, FICO, and your debt-to-income (DTI) ratio to name a few. Your DTI Ratio ensures your monthly debt payments are manageable. These two things go hand in hand with the interest rate and loan program for which you qualify.  Think the opposite–a lower DTI ratio typically strengthens your application, while a higher FICO strengthens it as well.

If your credit needs improvement, X2 Mortgage brokers offer personalized advice, including referrals to trusted credit repair resources, to help strengthen your profile before proceeding with your loan application.

 

Credit Scores and Interest Rates

Your credit score significantly shapes your financial picture by directly influencing your interest rate. Your FICO score will determine the interest rate you qualify for, with higher scores typically securing lower rates and better loan terms. For example, a borrower with a 760+ score might get a rate of 5.5%, while a 620 score might see 7% or higher.

Another way your interest rate will affect the overall picture is the impact on monthly payments. If your lower score leads to a higher interest rate, then your payment will be higher. Even small differences in rates can lead to significant increases in monthly payments and overall loan costs over time.

For easy math, let's take a $300,000 loan with a 30-year term. Here’s how monthly payments compare based on interest rates:

At 5.5% interest, the mortgage payment would be: $1,703.37 per month

At 7% interest, the mortgage payment would be: $1,995.91 per month

This shows a difference of $292.54 per month, which adds up to over $105,000 in additional payments over the life of the loan at a higher rate. This highlights the importance of maintaining a strong credit score to secure lower interest rates.

Credit Score and Loan Denial:

Life happens. Borrowers with poor credit may be denied a loan and may need to ask a family member or good friend to have a co-signer on the loan. If you don't have anyone who can co-sign, working with a credit repair company can help you with an actionable plan to increase your FICO score. 

 

Improving Your Credit Score

There may be a time to improve your credit score, and hey, no judgment here. Again, we want to educate and help as many people as possible improve their financial situation, no matter where they start. Here are some steps you can take to start leveling up. 

Step 1: Check Your Credit Report:

You are legally allowed annual, free credit reports from AnnualCreditReport.com. This pulls information from all three credit bureaus, Trans Union, Equifax, and Experian. Each credit report will have slightly different information, so it's important to check all three. 

If you need help, please don't hesitate to ask a loan officer for support while you are looking for errors, outdated information, or inaccuracies.

Step 2: Dispute Credit Errors:

Errors happen. When they do, contact your credit bureaus to correct errors on your report. You may need to provide documentation to support your dispute, so having that ready will expedite the process.

Step 3: Pay Bills on Time:

As stated above, payment history is the most significant factor in your credit score. Many apps and technologies help remind you of things. It is helpful for many people to set reminders or enroll in automatic payments to avoid late payments. Use technology to help you!

Step 4: Reduce Credit Utilization:

Aim to keep your credit utilization below 30% of your available credit limit. In other words, don't max out your credit cards. One strategy is to pay down your balances one at a time, or you can call your bank or credit company and request credit limit increases. 

Step 5: Avoid New Credit Inquiries:

It's a good idea to limit new credit applications at any time, but especially before applying for a mortgage. Multiple hard inquiries can temporarily lower your score, and that can make or break an interest rate.

When you are in the underwriting phase? Don't do it!

 

How Long Does It Take to Improve Credit?

Improving your credit score can take anywhere from a few months to over a year, depending on your current financial situation and the actions you take. Short-term improvements, typically within 3 to 6 months, can result from paying down credit card balances to reduce your credit utilization ratio. This can quickly give your score a boost. Additionally, correcting errors on your credit report, such as inaccurate or outdated information, may also yield faster results.

However, long-term strategies are essential for sustained improvement. Over 6 to 12+ months, consistently paying your bills on time builds a strong payment history, which is the most significant factor in your credit score. It's also important to avoid closing old credit accounts, as maintaining a longer credit history positively impacts your score.

For those planning to apply for a mortgage, it’s best to start improving your credit as soon as possible, or at least a year in advance. This gives you ample time to address any issues and strengthen your credit profile, increasing your chances of securing better loan terms.

 

Myths and Misconceptions About Credit Scores

Many misconceptions about credit scores can lead to confusion and mistakes. Let's continue to address these myths so you can be an informed consumer and increase your credit score! 

Myth 1: Checking Your Credit Score Hurts It

One common myth is that checking your credit score will hurt it. Soft inquiries, such as when you check your score, have no impact on your credit. Only hard inquiries, typically made when applying for loans or credit, can lower your score temporarily. 

Myth 2: You Need Perfect Credit to Get a Mortgage

Fortunately, many loan programs cater to borrowers with less-than-perfect credit, including FHA and VA loans and USDA loans. X2 Mortgage is a wholesale lender, and we service unique loans such as Chattel loans and other non-QM products that help borrowers with lower credit scores. 

Myth 3: Closing Old Credit Accounts Helps Your Score

Some people believe that closing old credit accounts will help their score, but the opposite is often true. Closing accounts can shorten your credit history and reduce your available credit, both of which can lower your score. 

Myth 4: Paying Off Collections Instantly Boosts Your Score

Lastly, paying off collections may not immediately boost your score, though it does signal to lenders that you are taking responsibility for past debts. These clarifications can help borrowers better manage their credit and avoid costly errors.

Conclusion

Credit scores play a critical role in mortgage approvals, interest rates, and loan terms. Improving and managing your credit can save you thousands of dollars over the life of your loan by securing better rates and conditions, as well as relieving stress and building financial confidence. By regularly checking your reports, disputing errors, and following strategies to improve your score, you will be able to feel confident when buying your next home. 

For free credit score advice or to explore mortgage options tailored to your credit profile, contact X2 Mortgage. Our experienced loan officers and mortgage team are here to guide you every step of the way, ensuring you secure the best possible terms for your home loan for your unique financial situation.

Call us today to schedule a free consultation and take the next step toward homeownership!