Every person applying for a mortgage will be subject to having their credit report pulled. Credit scores and mortgages go hand in hand, since you will not be offered a mortgage unless you meet certain criteria that define your ability to repay any loan you are given to purchase real estate.

When you apply for any type of loan, including a mortgage, the lender will likely access your credit report and your credit scores and creditworthiness. What do these terms mean and what factors contribute to them? How does this affect your mortgage application? Here are some answers to these questions.

1. Credit Bureaus

There are three major credit bureaus in the USA: Experian, Equifax and TransUnion. These bureaus collect information from lenders regarding your history of applying for, receiving and repaying credit. All of this information is combined into a credit report, and any lender can access these reports on request.

2. Credit Reports

The factors included in a credit report can include the following:

Credit Applications: applications made by you for credit, including credit card applications, mortgage applications and applications for personal loans, mail order credit, overdrafts – in fact any form of credit at all, whether you have been successful in your application or not.

Utilization of Credit: how you have used the credit offered, particularly revolving credit such as credit cards. Do you repay the balance immediately or are always close to your limit, how long you have used a line of credit, have you requested increases in credit limits, etc.

Length of Credit History: Having no existing credit history can be detrimental to your mortgage application. The longer your credit history, the better chance you have of getting more credit.

Repayment History: You history or repaying credit on time, late payment history, defaults, court judgments and so on.

Each of the three bureaus will generate its own credit report, which you can see on request and on payment of a fee. As stated, any individual or organization that you have approached regarding credit can do the same.

However, unless they feel a need to examine your credit situation more closely, most lenders, particularly mortgage lenders, will not go to the bother of checking up on three full mortgage credit reports. They will simply check up a single combined figure, known as your ‘credit score.’

3. Credit Scores

A company specializing in generating credit scores will take the combined data from Equifax, Experian and TransUnion and compile them to create one single credit score. There are currently two major compilers of credit scores in the USA: The Fair Isaac Corp (FICO) and VantageScore – the latter is relatively new, and the credit scores used for mortgages are generally FICO scores.

The factors outlined above are each given a weighting with regard to its effect on your credit score, most weighting being provided to your repayment history (35%). 30% goes to your credit utilization, including the ratio of your current debt to your credit limit. If you are always around your limit, you will be scored lower than if you use only a proportion.

The other factors make up the other 35% of the credit score. Recent credit searches can have a negative effect, so try to avoid making multiple applications for credit, because each one will be included in your credit report and score

Improving Your Credit Report

If you want to improve your credit score, you must improve the items on your credit report. Do not make any requests for credit in the few months leading up to your mortgage request: each new credit application will count against you. Also, do not cancel any credit cards or store cards, because canceling lines of credit will be included in your credit report, and have a negative effect on your credit score.

Try to keep your repayments up to date, and reduce the debt on credit and store cards rather than keep them around your limit. All of this will improve your credit score, or at least prevent it from dropping. Check your own credit score prior to making a mortgage application, because a refusal will be included in your credit report and will count against you. You should be looking at a FICO score of above 640, and preferably above 710. Some firms regard anything below 640 to be sub-prime.

Other Factors Other than Credit Reports and Scores

It is not only your mortgage credit report or credit score that affects your mortgage loan of course – there are other factors. Among these are your income and type of employment, your age, size of your debt and several other factors, but if your FICO score is below or above certain limits set by the lender, then you will either be offered a mortgage at a certain interest rate or you will not.