Do Mortgage Companies Go by Credit Score or Credit History?

Evaluate your credit before applying for home loans.

Evaluate your credit before applying for home loans.

When you apply for a home mortgage, potential lenders will delve deep into your financial history to get a good overall picture of your creditworthiness. Since your credit score is a compilation of everything found in your credit history, both factors are taken into consideration, albeit in different ways.

Credit Score

Your credit score is a numerical valuation of your creditworthiness as seen by the major credit reporting bureaus. As a general rule, the less debt you have and the more on-time credit payments you make, the higher your score. If you make late payments, default on loans or have things like bankruptcy, foreclosure or repossession in your past, your credit score can take a hit and be lower than average. Credit scores range from 300 to 850. Anything in the 650 range is typically considered to be a solid rating that will allow you to qualify for a competitive interest rate, provided your debt-to-income ratio is in line with the mortgage company's expectations. According to LendingTree, most lenders want your monthly home ownership expenses, plus other monthly debt payments like car loans and credit cards, to be no greater than 36 percent of your gross monthly income.

Credit History

All of your financial transactions that are reportable to credit agencies stay on your credit report for at least seven years. This typically includes credit cards, mortgages, auto loans and leases, medical bills, revolving debt payments of all type and student loans. Your report shows lenders when you applied for an account, how long the account was open, and your payment history during the duration. If you closed an account, had it closed on your behalf, paid off a debt for less than what you owed, went to collections or had a debt that was deemed “uncollectible,” it will be reflected in your credit history.

What Lenders Evaluate

While a mortgage lender will look at the total of your financial picture, it is primarily concerned with your most recent year or two of activity and your on-time credit payments. Lenders understand that people, especially young couples starting out, may hit some financial bumps in the road, particularly when repaying student loans or entering the job market and making initial upward career moves. For example, if you were late on a few credit card payments when you were in college, and your last several years have included on-time maintenance of all accounts, it shouldn't have a major impact on your ability to secure a mortgage. Serious financial issues such as bankruptcy may still linger after several years, simply because these are red flags that lenders find difficult to overlook.

Qualifying for a Mortgage

Before you start applying for mortgages, take a look at your credit report and make sure there are no errors like misreported late payments, accounts that aren't yours or inaccurate facts or figures. Get this cleared up before applying for a mortgage to ensure the best outcome. If you do have blemishes on your credit report, be prepared to explain them, such as a job loss, illness or other personal matter that legitimately prompted a financial hardship. Also, learn what potential lenders’ debt-to-income ratio numbers are. This can give you a heads-up for paying down debt if it will make you eligible for a more attractive and competitive loan package.


About the Author

Lisa McQuerrey has been a business writer since 1987. In 1994, she launched a full-service marketing and communications firm. McQuerrey's work has garnered awards from the U.S. Small Business Administration, the International Association of Business Communicators and the Associated Press. She is also the author of several nonfiction trade publications, and, in 2012, had her first young-adult novel published by Glass Page Books.

Photo Credits

  • Image Source/Digital Vision/Getty Images