Credit score and the credit report behind your score are major factors in determining whether you can qualify for a mortgage from a mortgage lender or for an approval in our Rent-to-Buy program, and it even determines the mortgage interest rate and private mortgage insurance you'll pay on that mortgage!  Because of this, it's important to know what factors influence your credit score and the home buying process - and more importantly, what doesn't. In this article, we're going to debunk 5 of the most common myths about credit scores and how to improve credit for mortgage readiness or for our Rent-to-Buy opportunity in as quickly as a few months. We'll also explain how understanding these myths can help you take steps to improve your score and get you started toward working on the mortgage application from mortgage companies and on the homebuying process. Let's get started!

Myth #1: Frequently checking your credit score will lower your credit score.

The Truth: Only “hard” inquiries will negatively impact your score.  When you check your credit on your own, it is considered a “soft” credit pull. Hard inquiries are credit inquiries that generally happen when you authorize a company to run your credit, especially if you are applying for an auto loan, a home loan, a personal loan, major credit cards, or store-based credit cards. These hard inquiries show up on your credit report and will have a temporary negative effect on your credit score, and having too many hard inquiries on your credit report will lower your score significantly. 

On the other hand, soft inquiries don't have any effect on your score at all, though these inquiries may appear on your credit reports. This is when you check your credit score and credit report on your own from the three major credit bureaus: TransUnion, Equifax, and Experian.  It is recommended that you monitor your credit regularly and over time to help you track your progress when building credit, and to also catch any problems before they get out of hand. You can easily check your credit score and get a free credit report on websites such as annualcreditreport.com, where you get one free credit report a year, and from credit card issuers, which have a FICO score display included with their services.

Myth #2:  Making good income positively impacts your credit score and looks great to lenders. 

The Truth: Your income, no matter how much you make, is not an important factor and does not directly affect your credit report or your credit score. Your income in fact is never included on credit reports, so it can’t be reported to the credit bureaus and impact your credit score. Your FICO score is influenced by five differently weighted factors, including on-time payments, or positive payment history (35%), your amount of debt owed, or credit utilization (30%), the length of your credit history (15%), your new credit lines (10%), and a credit mix (10%). 

Making a good salary may help improve finances, but your credit score is based on how you have managed credit in the past.  Unfortunately, a bad history of managing credit isn't automatically tied with good income. When making mortgage applications, your income and your credit report are analyzed as two separate pieces when being pre-approved for a mortgage loan.  No matter how much money you have saved or how much money you’re earning, making on-time payments on any outstanding accounts is the best thing you can do to build credit, improve your credit score, and get closer to being pre-approved for a mortgage.

Myth #3: Carrying credit card balances will improve your credit score and help with getting approved for a loan.

The Truth: High balances increase the interest you owe and definitely will not increase your credit score.  In fact, this is an important factor that has the potential to lower your score, increase your debt to income ratio, and waste extra money since you will need to pay interest on the balance over time. Any lingering balance on your credit card is reported to the three credit bureaus and credit line accounts directly affect your utilization ratio. The higher your balance is, the higher your credit line and credit card debt is. This correlates to a higher utilization rate, which can, in turn, can hurt your credit score and can affect the amount you'd be approved for on a mortgage loan.  

The best practice would be to spend well below your credit limits on your credit accounts and to strengthen your payment history by paying most or all of your balance every month, and of course, avoiding late payments and missed payments.

Myth #4: Closing an old line of credit or credit card will increase your credit score. 

The Truth: Closing an existing line of credit or credit card, especially if you've had that line of credit or card for a long time, is more likely to hurt your credit score than to improve it. This is especially true if you close the card with a balance and do not pay the balance before closing. Because part of the calculation of your credit score comes from the length of your credit history,  if you close a card that you had for some time, your score could be negatively affected.  

The opposite is true - the longer you've used a particular credit card and have avoided late payments, the better effect that credit card or line of credit will have on your credit score. If you keep the account well below the credit limit and avoid late payments, keeping the credit card can also help improve your fico score, your credit utilization, and your credit utilization ratio. So just leave your accounts open, especially if they’re in good standing and if the line of credit or credit card has no annual fee, a low interest rate, or a low annual percentage rate.

Myth #5: Marrying your partner will merge your credit scores and appear positively to lenders.

The Truth: After you get married, you and your spouse will continue to be seen as two individual entities with two separate credit scores, two different credit histories, and a combined credit utilization ratio.  Just because you marry someone with good credit, it won't automatically improve your credit score and qualify you for a mortgage from lenders. Likewise, marrying someone with bad credit won’t negatively impact you directly.  

However, if you make a mortgage application together, your individual credit scores are both checked by mortgage lenders, but your qualification for the mortgage loan and how much private mortgage insurance you will have to pay (if applicable) will be based on the spouse with the lower score.  It's very important to know which spouse has the lower credit score, and if necessary, take the steps to improve that score before working with lenders for a home loan.  Additionally, there is not one credit bureau that ranks higher than the others.  Lenders will take base their decisions on the credit bureau score that is the middle score of the spouse with the lower credit.

So what are your next steps?

In addition to these five common myths, there is much more to learn about building and maintaining a good credit score to get qualified to buy a home from mortgage lenders or to be approved for our Rent-to-Buy program.  Remember, there are a number of factors that appear on your credit profile as you work on a credit repair plan and your path to excellent credit, including no or low late payment history, a good credit utilization rate when you pay more than the minimum payment on installment loans, personal loans, auto loans, credit cards, and other credit accounts and have a higher credit limit on existing accounts, limiting the number of new accounts and new debt while maintaining multiple lines of existing accounts for longer credit history, and removing any inaccurate information. These all contribute to a higher score and qualifying for a conventional loan with the lowest interest rate possible on your loan.  

The mortgage process may be a long one, but it is worth it, and we are here to help! We work with multiple lenders that work with all levels of FICO scores to get a the home loans that would be right for you. Whether your credit score quickly jumps, or it takes much more time than expected, we can work with you to remove your specific barriers and get you qualified as quickly as possible for a home loan or for our Rent-to-Buy opportunity.  In our team's eight years in real estate, we have helped hundreds of families become first-time and first-generational home buyers for the same qualifications as what most landlords look for in qualified renters.  

Despite common belief, you don't need tens of thousands of dollars saved and a credit score in the 700s to land your dream home.  With the combination of first time home buyer grants, Seller's Assist from the home seller, and lender credits, we have helped hundreds of families land their dream home sometimes for as little as $2,000 or $3,000 out of pocket!  And ready for some more good news? When we help people go from renting to buying, many times, our client's monthly mortgage payments are $200-$300 less than what they were paying their landlord for rent.  The journey to homeownership may be a long one, but we are here to help you fire your landlord once and for all and begin to build your own wealth for your own family and for your own legacy. Contact us now to get started!