Kendra Thurston (courtesy photo)

The mortgage industry and the real estate industry go hand-in-hand. Potential home buyers often have a multitude of questions regarding the home buying process. “How much does credit play of in the home buying process?” is asked frequently. You can choose to purchase your home using cash or by financing the purchase. If you choose to finance through a bank or mortgage lender, your credit rating will play a part in your loan options.

A credit score is a three-digit number designed to show cred­it-worthiness. It demonstrates how likely a person is to repay borrowed money based on previous borrowing experience. The number is gathered from each of the three major credit report­ing bureaus; Equifax, Transunion, and Experian. Each credit reporting agency keeps track of payment history including late and on-time payments, high and low balances, and how long an account has been open. Credit reporting agencies use this information to calculate a credit rating ranging from 300-850.

Credit card companies, car loan companies, and others report your account history to a credit reporting agency. Some com­panies may choose to report to one of the three major credit reporting agencies or all three of them. When you ask for your credit report, it is likely that you will receive a different score from each credit reporting agency.

When applying for a bank loan, banks use the FICO score from each of the three credit bureaus. The Fair Isaac Corpora­tion, better known as FICO, created a formula widely used by mortgage lenders to determine credit ratings. While each in­dividual bureau has a credit score that is generated by them, a FICO score is a separate credit rating used by mortgage lenders. Lenders typically use the middle of the 3 FICO scores from each major credit reporting bureau in a mortgage application. The higher the number, the lower the risk for a lender.

Mortgage lenders need to assess the risk to themselves before lending money to borrowers. When applying for a loan, a bor­rower is asked for a full financial profile. A full financial profile includes FICO scores, assets, and income. Your FICO score and income play a large part in the loan amount and interest rat you will receive.

Mortgage lender typically prequalify a borrower once they have reviewed and approved their mortgage application. A pre-qualification is an estimate of the loan amount and interest rate a borrower can expect from the lender. Home buyers will use the pre-qualification letter to determine monthly mortgage payments and choose a purchase price for their home.

Credit scores will impact the amount of interest on a loan, which translates into a higher or lower monthly mortgage pay­ment. Once a home buyer knows the pre-qualification amount, they can be ready to begin their home search. The more infor­mation you have for your real estate agent, the better equipped they are to help you find the perfect home.