The first of a 10 part series on what you need to know about mortgages. Today, Mike Goblet talks about the impact your Credit score has on qualifying for a mortgage.  Banks use your credit score as the first determination of risk you pose to them of defaulting.  It becomes the foundation for the whole mortgage process and the costs associated with it that the banks create. Banks assume everybody has the ability to default, and now, like an insurance company, they want to rate that risk. The higher your credit score, the less risk you pose to them. The scores range, in terms of your credit scores, of 0 ‑‑ some people actually have no credit scores ‑‑ to 850, as the perfect score.

The three bureaus of Equifax, TransUnion, and Experian are what they use, but what banks do is they don’t take the highest score or the lowest score. In fact, they throw them out and say the biggest risk with, “Let’s go with the mid‑score.” Whatever your mid‑score is out of the three becomes your FICO score for a mortgage. Get all the details on how your credit score impacts your mortgage rate and ability to get a loan with the full video:

Matt OBrien:  …welcome back to another segment of “Arizona Mortgage News.” We’re here with our resident expert, Mike Goblet of United Mortgage and Financial Group. Today, we’re going to start the first of a 10‑part series on what you need to know about mortgages. Mike is going to hit hard with the first topic, which is the impact of your credit score. Good morning, Mike.

Mike Goblet:  Good morning, Matt. It’s good to see you again.

Matt:  You, too.

Mike:  I think starting with your credit scores is a great first topic because it becomes the foundation for the whole mortgage process and the costs associated with it that the banks create. Banks use your credit score as the first determination of risk you pose to them of defaulting.

They assume everybody has the ability to default, and now, like an insurance company, they want to rate that risk. The higher your credit score, the less risk you pose to them.

Matt:  And the better interest rate you get, which is cool.

Mike:  It leads to significantly, potentially, a better interest rate. You are correct. Actually, more importantly, the lower you get, the more risk you pose to them, so the higher your rate becomes, as a result of that. The scores range, in terms of your credit scores, of 0 ‑‑ some people actually have no credit scores ‑‑ to 850, as the perfect score.

Candidly, I’ve never seen anybody with 850. I don’t even think Bill Gates has an 850 credit score. There are three bureaus that report to the banks. That’s what makes it a little bit different than if you were applying for a car loan or insurance or even a credit card, which often only pull one.

The three bureaus of Equifax, TransUnion, and Experian are what they use, but what banks do is they don’t take the highest score or the lowest score. In fact, they throw them out and say the biggest risk with, “Let’s go with the mid‑score.” Whatever your mid‑score is out of the three becomes your FICO score for a mortgage.

Matt:  Do they vary that much, the three

Mike:  They actually can. Because it’s a snapshot in time between all three, and because some of them, strangely enough, report things or may have not caught up with what the other lenders have, I’ve seen them range as much as 50 or 60 points between the different bureaus, depending upon what they’re reporting. Seldom are they actually all the same.

Matt:  Interesting.

Mike:  The real key is a 740 mid‑score. That seems to be the biggest safety net for lenders. If you get higher than 740, they go, “Job well done, but you don’t get any more advantage.” Once you stop dropping below 740, that’s when they put in the adjustments and they start taking things away, in terms of the rebate, et cetera, and your risk improves.

They break down in 20‑point increments. By the way, if 740’s the break line, 739 falls into the next category. They don’t round up. The difference between 720 and 739 is exactly the same. Now, you can usually do conventional loans down to 640, although obviously, the adjustment becomes higher, and you can do FHA and VA usually down to about 580 with a mid‑score in those ranges.

That’s really the bracket of it. The real question becomes, “How do you check your credit score in advance of the process?” Candidly, if you’re buying a home, you really should. As a matter of fact, you should check what the credit bureaus are reporting regularly. There’s a website you can go to ‑‑ it’s www.annualcreditreport.com ‑‑ and pull a free copy of your credit report.

Matt:  Now, does running your credit score have an impact on your credit score?

Mike:  The answer is, if you’re having a lender, a bank or an automotive, yes, it will impact your credit score. But you can shop for any of the items you’re doing, like a car and a mortgage, and for a period of time within that window ‑‑ generally about 30 days ‑‑ all pulls towards that category only count as one. It’s just the initial pull, so that you can shop.

Matt:  Good to know.

Mike:  You should go to the annualcreditreport.com, pull a copy from each bureau differently. In other words, do one every four months, so you can see what’s reported. You’re allowed to do three per year, one from each bureau. If you rotate them that way, it’s a good way to get at it.

The real key, now, is also, people often wonder, “What’s in my credit report? How do they get their percentages? What creates your FICO score?” Actually, I almost think nobody really knows for sure. It’s really about mathematical algorithms that they use to determine the credit score.

The five variables they use are your length of credit history, your credit payment history, the percent of your credit being used versus the limit on each open line of credit. New credit, if you’re opening it up, has an impact, actually negative, as we’ve just mentioned.

Then, there’s something called mixed credit, which candidly, I haven’t been able to find anybody that can define what mixed credit is, but it’s a variable that the system uses.

Matt:  The X factor.

Mike:  It is an X factor, which probably lets them go, “No, that’s how we got there. It was the X factor. We can’t tell you anything else.” Now, one of the questions most consumers have is, “Can I get my own scores?” As a matter of fact, many will tell me, “No, I have a service that gives me the scores.”

Candidly, they do, but don’t necessarily think that that’s the score that a bank or myself are going to get as to what your Discover card is giving you or Credit Karma is giving you. What happens is, they don’t use the same information to get you that score. I think you can realize that the risk factor of a credit card default is not the same as a bank for mortgage.

They really put many more tough scrutiny on it than a credit card will or insurance or even automotive. Generally, I find when you go to Credit Karma or whatever, those scores are significantly higher or have the potential to be significantly higher than the scores I’m going to get.

Matt:  Making you feel good.

Mike:  It makes you feel good, and it is accurate for whatever they may be utilizing, but it isn’t across the board of what your credit score is. What I really actually get frustrated with is many people pay for that service, find out when they call me, “No, I have a 740 credit score,” and I find out it’s 680. They go, “How can that be?” It’s a different algorithm that’s being used to calculate.

There’s also something to keep in mind. You can have a reasonable credit score and still not qualify for a mortgage.

Matt:  Why would that be?

Mike:  It’s because that banks look at different levels of risk, like I just said. If you have two mortgage lates in a 12‑month period, or one 60‑day late, those are Fannie‑Freddie guidelines, or the traditional guidelines, for qualifying for a mortgage that says, “You don’t qualify.”

One 60‑day late in a 12‑month period, regardless of your credit score, will disqualify you from a mortgage. Something to keep in mind, as well, that it’s the impact of what you do, not just your score.

Matt:  Very good.

Mike:  Actually, another thing that many people, when they call about credit, and we’re going through it, they say, “I want a copy of my credit report. I paid for it, and I deserve it.” Unfortunately, the credit laws are not written that way. I’m prohibited from law from sending you a copy of that credit report. That’s how much the credit bureaus protect it.

I can share your credit scores. I can even identify specific accounts that are causing problems, but I am prevented by law from sending a copy of that report. Every bank is.

Matt:  Got to protect the data.

Mike:  Or it actually keeps them much more important, I think is part of what it also is. The impact of your credit score becomes the foundation for the rest of the process and the evaluation. Know your credit score, and protect it when you can.

Matt:  Very good. Very enlightening, Mike. If people have questions about their credit score and interested in talking to you about mortgages and opportunities, what’s the best way to get in touch with you?

Mike:  Obviously, I can be reached at our company phone number, of United Mortgage Financial Group, at 480‑503‑3533. You can call me direct on my cell phone, at 480‑220‑2329, or email me at mike.goblet@ ‑‑ our company initials ‑‑ umfginc.com.

Matt:  Excellent. Always interesting, and enlightening, as always. Look forward to the next segment.

Mike:  I look forward to providing another short update on getting qualified for a mortgage. Thanks, Matt.

Matt:  Thank you, Mike…