Agent Joyce Marie Jackson returns for another installment in her “Credit Healthy” series with information about the all important pre-approval. A very important step in the process of buying a home, a lender’s pre-approval relies on several factors, including your credit score. Let’s hear from Joyce…
Too often, people are more interested in their credit score than what’s in their credit report. The truth is a person can have a good credit score and still not qualify for a loan or credit card for a number of reasons. This concern opens the door for one of the most important questions a Realtor will ask a potential buyer, “are you pre-approved?” This important question may cause a buyer to stop communicating with the Realtor…for some misunderstood reason, for some buyers, the question seems offensive and invasive.
If it was asked incorrectly, I understand. However, it is one of the most necessary questions a Realtor will ask a buyer in addition to asking if you are already signed with another Realtor. Too often a person pulls their credit history and gets their credit scores through a number of sources for free or a small fee. The scores that come with this type of report may show credit scores at a higher number than what a lender will pull. It is frustrating trying to understand why the scores are so different. More to the point, why are the Lender scores usually much lower than what the buyer can pull independently?
There are a few reasons why. Most lenders will pull the FICO (Fair Isaac Corporation) score and there are several types of FICO scores: FICO Auto Score (250-900), FICO Bank Card Score (250-900), and FICO Mortgage Score (300-850). Other types of FICO scores vary: FICO 5, FICO 2, FICO 4, FICO 8, and FICO 9 all exist. They are similar and different. In addition, all lenders may not use the same FICO score algorithm. The FICO score will consider more of your debt than other types of credit scoring systems.
Once a lender receives your three credit scores, lenders have a formula that they use to determine your final score. One example could be, from three credit bureau, your scores were 730, 685, and 710. The highest and lowest score is knocked out. The middle score will stand as the winning number, 710.
With other types of scoring systems such as Vantage, all debt may not be included therefore resulting in a higher credit score.
These are just a few reasons why your free credit scores may be higher than the one the lender will pull. So, what should you do? You can still get the credit report and use it to clean up anything that is not yours or should not be there. Once you’ve done the credit clean up, then allow a lender to pull your report and provided you with the scores that will be used to qualify you to purchase your home. The Lender will go over the report with you and provide tips if needed to help boost your score. After the lender receives requested documentation, verifies employment, and the credit score is right, you will receive a pre-approval letter naming the amount you can purchase at. Sounds like a plan. So, the next time a Realtor asks if you are pre-approved, don’t let that question scare or stop you from moving forward. Knowing the answer to that question will open the door for a successful home buying adventure.
image courtesy of karmadude