Understand Your Credit Before You Buy

What are the three pillars lenders look at?

When you apply for a mortgage, lenders look at many things. Three of the biggest are your credit, your income, and your debt-to-income ratio. Think of them as three legs of a stool. If one is short, the whole thing wobbles.

A strong score does not make up for income a lender cannot verify, and a good income can still be stretched thin by large monthly debts. Lenders look at all three together.

How does debt-to-income ratio work?

Your debt-to-income ratio, or DTI, compares your monthly debt payments to your gross monthly income, which is your income before taxes.

The limit a lender allows depends on the loan type, the lender, and the rest of your file, so ask a lender what applies to you. Everyday bills like groceries, utilities and your phone usually are not counted in DTI, but they still affect what you can comfortably afford.

What is a credit score?

A credit score is a three-digit number that sums up what is in a credit report at a moment in time. It is meant to predict how likely someone is to repay a loan on time. Many common scores run from 300 to 850, and higher is generally better.

Scores are calculated by scoring companies, such as FICO and VantageScore, using information reported to the three nationwide credit bureaus: Equifax, Experian and TransUnion.

What usually goes into a score

• Payment history: whether you have paid on time.
• How much you owe, especially credit card balances compared with your limits.
• How long you have had credit.
• New credit, such as recent applications and newly opened accounts.
• Your mix of credit, such as cards, car loans and student loans.

Your credit report is the detailed record. Your score is a summary of it. If the report is wrong, the score built on it can be wrong too.

Why do scores and reports matter for a mortgage?

Your credit reports and scores can affect whether a lender approves a mortgage and the terms it offers, including the interest rate, the down payment required, and the cost of mortgage insurance.

Even a small difference in rate adds up over time. For example, on a $400,000, 30-year loan, the difference between a 6.5% and a 7% interest rate is about $133 a month in principal and interest, or roughly $47,900 over the full term.

These numbers are only an illustration, not a quote or a prediction of the rate you would get.

Why might the score I see online differ from my lender's?

It is common to see one score in an app and hear a different number from a lender. That does not necessarily mean anything is wrong. A few common reasons:

Free scores can be useful for watching trends, but for a mortgage, the lender's numbers are the ones that count. If you want to know the scores a lender would see, ask a lender.

What does credit monitoring tell you, and what doesn't it?

Credit monitoring services watch one or more of your credit reports and alert you to changes. They can be helpful, as long as you know their limits.

How do I check my reports and fix mistakes?

1. Get your free reports

   You can get free credit reports from Equifax, Experian and TransUnion at AnnualCreditReport.com, the official site for free reports.

2. Read every section

   Check your name, addresses, accounts, balances, payment history and any collections. Look for accounts you do not recognize.

3. Dispute mistakes in writing

   If something is wrong, contact the credit bureau showing the error and the company that reported it. Explain what is wrong, include copies of documents that back you up, and keep copies of everything you send.

4. Follow up

   The bureau must investigate and report the results back to you, and the company that reported the information generally must respond to a dispute within 30 days. The Consumer Financial Protection Bureau (CFPB) has sample letters and step-by-step instructions.

AnnualCreditReport.com (opens in a new tab)CFPB dispute instructions (opens in a new tab)

Only information that is inaccurate or incomplete can be corrected this way. Accurate information, even if it is negative, generally stays on your report for a set period of time.

What are legitimate ways to improve credit over time?

There are no shortcuts, but there are steady habits that tend to help over time:

• Pay every bill on time. Automatic minimum payments can help you avoid an accidental late payment.
• Pay down credit card balances, so you use less of your available credit.
• Apply for new credit only when you need it, especially in the months before a mortgage application.
• Think twice before closing older cards, since that can shorten your history and lower your available credit.
• If an account is past due or in collection, contact the creditor to understand your options.
• Before and during a home purchase, talk with your lender before making big purchases on credit, like a car or furniture.

Results vary from person to person. No one can honestly promise a specific score, approval, rate or timeline.

Who can review my credit and tell me what I qualify for?

Individual credit review and qualification should be handled by a licensed mortgage lender or a qualified credit counselor, such as a HUD-approved housing counselor. A lender can tell you what kind of loan you may qualify for. A counselor can help you understand your report and make a plan.

As a real estate broker, I do not pull credit, review credit reports, or decide who qualifies. What I can do is help you plan your home search around what a lender tells you.

Want to learn more?

Free official resources

• AnnualCreditReport.com, for your free credit reports (opens in a new tab)
• CFPB: How do I dispute an error on my credit report? (opens in a new tab)