Your Credit Score Isn't the Gatekeeper You Think

Almost everybody who calls us about a first mortgage says a version of the same sentence: "I think my credit is too low."

Almost nobody who says it has checked what the programs actually require. The number they are worried about is usually well above the floor, and the floor is usually well below where they imagine it — the most common guess we hear is 700, and not one of the four major loan programs asks for anything close to that.

The score does matter. It matters in a different way than most people think, and understanding which way is worth real money. Here is what the number is, what each program asks for, and what a higher score actually buys you.

What a Credit Score Actually Measures

A credit score is a prediction, not a grade. It is a three-digit summary of how likely you are to fall ninety days behind on a debt in the next couple of years, calculated from what is in your credit report and nothing else. It does not know your income, your savings, your job title or how much you have in the bank.

The scores mortgage lenders use come from FICO, which publishes both the scale and the recipe. The scale runs from 300 to 850. The recipe is five ingredients, and FICO gives each of them a weight:

• Payment history — 35%. Whether you have paid on time. It is the largest single factor by a distance, which is why one missed payment does more damage than a large balance.

• Amounts owed — 30%. Chiefly how much of your available revolving credit you are using. A card at $4,800 of a $5,000 limit reads very differently from the same $4,800 spread across four cards.

• Length of credit history — 15%. How long your accounts have been open, and the average age of them. This is the factor you cannot hurry.

• New credit — 10%. Recent applications and recently opened accounts. Several in a short window read as pressure.

• Credit mix — 10%. Whether you have handled more than one kind of borrowing — a card, a car loan, a student loan.

Two thirds of the score is paying on time and not maxing out what you have. Everything else is rounding.

Two practical notes that follow from that list. You have more than one score — each of the three credit bureaus holds its own file, and a mortgage lender pulls all three and works from the MIDDLE figure rather than the best or the worst. And the score on a free app is often a different model than the one a mortgage uses, so treat it as a temperature reading rather than the number your loan will be priced on.

The Floors Are Lower Than Almost Anyone Guesses

Each loan program sets its own minimum, and the four that matter to most Utah buyers set four different ones.

• FHA: The Federal Housing Administration allows 3.5% down at a score of 580 and above, and still allows the loan at 500 to 579 if the down payment is 10%

• Conventional: No federal floor, but lenders generally look for 620 or better on a conforming loan

• VA: The Department of Veterans Affairs sets no minimum credit score at all — the lender sets one, which is why two lenders can give an eligible veteran two different answers

• USDA: The USDA likewise publishes no minimum score; lenders commonly want to see 640 to run the file through automated underwriting

The published floors, side by side:

FHA at 3.5% down

580

FHA at 10% down

500

Conventional

620

VA and USDA

None set

See what a payment looks like at your price

Two things are worth pulling out of that table. The first is that "no minimum" is not the same as "no standard": where the VA and the USDA set no floor, the LENDER sets one, and lenders differ. A veteran turned down at one shop has not been turned down by the VA.

The second is that a floor is a door, not a promise. Clearing 580 means FHA will consider the file; it does not mean the file is approved, because the score is only one of the things an underwriter reads. More on the other three at the end.

The Score Is a Price Tag Far More Often Than a Verdict

Here is the part almost nobody is told. On most loans the score does not decide whether you get the money. It decides what the money costs — and the largest single lever it pulls is private mortgage insurance.

PMI is what protects the lender when you put less than 20% down on a conventional loan, and unlike its FHA equivalent it is priced per borrower rather than set by a schedule. Same house, same loan, same day, two credit scores, two very different bills.

One conventional loan — $350,000 house, 5% down — priced at two credit tiers:

Both borrowers qualify. Both get the house. The one on the left pays $11,471 more over five years for exactly the same loan — which is what "the score prices you" means in dollars. The rates are the ones The Truth About Mortgage and ConsumerAffairs publish for those tiers; the arithmetic is ours.

The question is rarely "will they lend to me". It is "what is my score charging me to borrow".

This is also why an FHA loan can be the cheaper option at a lower score and the dearer one at a higher score. FHA charges every borrower the same insurance premium regardless of credit; conventional charges you yours. Below roughly 680 that flat rate is usually a bargain, and above roughly 720 it usually is not. Our own FHA versus conventional comparison works that example all the way through on the same house.

What Applying Actually Does to Your Score

The second fear, right behind "my score is too low", is that shopping for a mortgage will wreck it. The mechanics here are unusually friendly and almost nobody knows them.

• Checking your own credit report is a SOFT inquiry. The Consumer Financial Protection Bureau is explicit that it does not affect your score, however often you look.
• A lender pulling your credit to price a loan is a HARD inquiry, and a single one typically costs a healthy score a few points.
• FICO treats a burst of mortgage inquiries as one event. Rate shopping inside the window its newer models use — 45 days — counts as a single inquiry no matter how many lenders you approach, and inquiries are also ignored entirely for the first 30 days.

Shopping three lenders in one fortnight costs about what shopping one costs. Shopping three lenders across four months does not.

The practical rule is to do your comparing in a concentrated block. A loan officer can also tell you a great deal before any credit is pulled at all — what the programs need, roughly where you land, what to fix first — which is a conversation with no cost attached to it whatsoever.

What Actually Moves a Score in Ninety Days

Most buyers have a season, not a decade. These are the moves that fit inside one, in rough order of how much they tend to be worth:

• Pay revolving balances down, not off. Amounts owed is 30% of the score and it updates every statement cycle. Bringing a card from near its limit to comfortably under a third of it is the fastest legitimate gain available to most people.

• Do not close the old card. Closing an account removes its limit from your utilisation and eventually its age from your history. The instinct to tidy up before applying is the one instinct here that usually backfires.

• Dispute what is actually wrong. A collection that was paid, an account that is not yours, a balance that is stale. You are entitled to your reports and correcting a genuine error can move a score quickly.

• Stop opening things. New credit is 10% of the score and it also resets the average age of your accounts. The store card at the checkout is not worth it in the six months before you buy.

• Pay everything on time, without exception. It is 35% of the score and there is no shortcut in it. One late payment during a mortgage application can undo a year of work.

What does not work: paying a company to "repair" a report that is accurate, and moving a balance between cards on the day of an application. Neither changes what the file says about you.

The Score Is One of Four Things an Underwriter Reads

The reason a good score is not an approval, and a mediocre one is not a rejection, is that it is one input of four. The others:

• Income and how steady it is — how long you have earned it, whether it is likely to continue, and how it is documented.
• Debt against that income — the monthly obligations you already carry, measured as a share of what you earn before tax.
• Assets — the cash for the down payment and closing costs, and what is left behind it.
• The property itself — what it appraises for, and what condition it is in.

Files are approved every week with scores in the 600s and strong everything else, and declined every week with scores over 740 and too much debt behind them. The score is the loudest of the four inputs and it is not the biggest.

Alliance Lending Services writes conventional, FHA, VA, USDA and other mortgage programs, which is the reason this article can tell you that the floor is 580 rather than steering you at whichever product we happen to sell. If you want to know where you actually stand, that takes one conversation and no credit pull.

This content is for educational purposes only and is not a commitment to lend. All figures shown are examples: credit requirements, mortgage insurance rates and program guidelines vary by borrower, property and lender and change over time. Every loan is subject to credit approval and program guidelines. Alliance Lending Services, NMLS #304510. Equal Housing Opportunity.