Ryan Van Til
Mortgage Advisor, NMLS #02336853 | Pacific Trust Mortgage
Your credit score is one of the biggest factors in your mortgage rate, but there is a lot of bad advice floating around. Here are five myths I hear constantly from buyers, along with what actually matters.
"You need a 780+ to get a good rate."
This is the most common myth I encounter. The truth is that mortgage pricing works in tiers, and the best pricing kicks in around 740 to 760 for most loan programs. A borrower with a 750 score is getting nearly identical pricing to someone with an 800. Even at 720, the rate difference is often just 0.125% to 0.25%. You do not need a perfect score to get a great deal.
"Checking your own credit score will hurt it."
When you check your own credit through a service like Credit Karma, your bank, or AnnualCreditReport.com, that is a soft pull. Soft pulls have zero impact on your score. A hard pull, which happens when you formally apply for credit, can temporarily lower your score by a few points. But even hard pulls from mortgage shopping are grouped together by the credit bureaus. If you apply with multiple lenders within a 14 to 45 day window (depending on the scoring model), they all count as a single inquiry. So shop around without worrying.
"Closing old credit cards helps your score."
This one can actually backfire. About 30% of your credit score comes from your credit utilization ratio, which is how much of your available credit you are using. If you have a card with a $10,000 limit and you close it, your total available credit drops. That means the same balances on your other cards now represent a higher utilization percentage. Closing old cards can also shorten your average account age, which is another factor in your score. Unless a card has an annual fee you do not want to pay, it is usually better to keep it open with a zero balance.
"You should pay off all debt before applying for a mortgage."
Having some debt is not a problem. In fact, having a history of responsibly managing debt (like a car loan or student loans) can help your credit profile. What matters more is your debt-to-income ratio. Lenders look at your total monthly debt payments relative to your gross income. If your DTI is within guidelines (generally under 45% to 50%), carrying a car payment or student loan is perfectly fine. Do not drain your savings to pay off low-interest debt right before buying a home. You will need that cash for the down payment and reserves.
"A co-signer always helps."
Adding a co-signer can help with income qualification, but it does not always help with rate. The lender uses the lower of the two middle credit scores between the borrower and co-signer. So if your score is 720 and your co-signer has a 680, the lender prices the loan based on the 680. That could actually result in a higher rate than if you applied alone. Co-signers make the most sense when you need additional income to qualify, not just a credit score boost. Always run the numbers both ways before adding someone to the application.
Quick Credit Tip
The fastest way to boost your credit score before applying for a mortgage is to pay down revolving balances (credit cards) below 30% of their limits. If you can get below 10%, even better. This single change can improve your score by 20 to 40 points within one billing cycle.