Consumers today may take for granted that mortgage lenders look at their credit scores and reports when they apply for a loan. However, there are a number of misconceptions present when it comes to credit scores and mortgages. Homebuyers who are aware of these credit score myths may be able to avoid a credit-related headache down the road.
Myth 1: Homebuyers with a pristine payment history don’t need to check their credit score
Credit scores take more into account than just an individual’s payment history. Many credit reports track how consumers use their credit, how much of it they have used in comparison to how much is available and the length of their credit history. There are a number of credit behaviors that may have a surprisingly negative impact on an individual’s credit score, including the cancellation of numerous credit accounts in a short period of time. Homebuyers should be aware that credit scores are not meant to track broad financial behaviors, but rather to gauge the likelihood an applicant would default based on how he or she makes use of certain lines of credit.
Myth 2: Checking credit scores and reports can drag a score down
Homebuyers sometimes misconstrue how credit inquiries affect their credit score. While it’s true a “hard” credit inquiry — which can be seen by creditors as an application for new credit — may impact a credit score, simply checking a credit score is not considered a hard inquiry. In fact, it may be more harmful for homebuyers to go into the moving process without checking their credit reports and scores. Obtaining that information well before buying a home may allow time for homebuyers to repair credit errors.
Myth 3: Lenders will only accept those with perfect credit
Lenders are scrutinizing credit reports and scores with more fervor today than in the past, but that does not mean homebuyers with lower credit scores will be locked out altogether. A good credit score may help mortgage applicants qualify for the lowest interest rates and most favorable loan terms, while applicants with lower scores may have to pay a higher rate and fees such as mortgage insurance. Homebuyers concerned with a low credit score may also want to consider a home loan from the Federal Housing Administration, which specializes in offering financing to borrowers who could not receive any from regular lenders.