Credit Score vs. Credit Report in Mortgage Lending

As you begin to focus on your financial health, you’ve probably come across the terms “credit score” and “credit report.” Although some people use the terms interchangeably, they actually refer to two separate things. 

If you're wondering what the difference between the two is, we have good news! This article will examine how a credit report differs from a credit score and what both mean for your creditworthiness as you work towards securing a mortgage loan. 

The Differences Between A Credit Score and Credit Report

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rms “credit score” and “credit report” refer to two different aspects of your financial state. Although both are incredibly important and detail your credit activity, they’re used and created in two different ways. We’ll take a look at what each of the terms means below. 

What Is A Credit Score?

Your credit score is a number between 300 and 850 that reflects your credit risk. Its primary purpose is to indicate to lenders how likely you are to pay a loan back on time. It also gives insight into your general level of financial responsibility. The higher your credit score, the better you’ll look to potential lenders. 

Similarly, a low credit score deems you a liability and makes it difficult for you to obtain credit. Although it’s a single number, a variety of factors go into calculating your credit score. The following is a list of factors that determine how high or low your credit score is: 

• The amount of debt you owe
• The number of missed or late payments you’ve made
• The number of open accounts you have
• The number of new accounts you’ve opened recently 
• The different types of credit you have
• How long your credit lines have been open

What Is A Credit Report?

A credit report is a detailed summary of your credit activity. Credit reports are much more comprehensive than a credit score and take more factors into consideration. Credit reports include information like the current state of your credit activity, the status of your credit accounts, and your loan repayment history. They’re essentially an in-depth measure of how financially responsible you are. 

How Credit Scores and Credit Reports Differ

While credit scores are a single number, credit reports are a complete account summary. But the two are not entirely separate entities. The information contained in your credit report determines how high or low your credit score is. Bettering your credit report will lead to a higher credit score and vice versa. 

How Credit Scores and Credit Reports Are Used

Credit scores and credit reports are used to predict how risky it is for a lender to lend you money. Both are used to determine: 

• Whether you should be offered credit. Credit scores and credit reports provide insight into how responsibly you pay off debt, so a credit lender can determine if they should take a risk by lending to you. Since they both relay your financial responsibility, your credit score and report can severely harm or help your ability to get a loan or acquire a new line of credit. 
• How high your interest rate should be. Credit reports and credit scores also determine the interest rates you’ll pay. A good credit score is rewarded with lower interest rates and a low credit score is punished with higher interest rates. 

How Credit Reports Are Accessed

The Fair Credit Reporting Act is a federal law that limits who can view your credit. That means credit reports can only be accessed by creditors, potential credit lenders, or businesses with a clearly defined and legitimate purpose. Your credit report isn’t open to members of the general public. 

For a person or business to request your credit report, they’ll need to have a permissible purpose. Permissible purposes are specific, justifiable reasons why a person or entity needs to pull your credit history. Some examples of who can access your credit report are: 

• Insurance companies
• Utility companies
• Landlords for tenant screening
• Subpoenas and court orders
• Current and prospective employers 

In many cases, the business or person will need your express permission to access your credit report. In that case, they will ask for identifying information about you, including your social security number. They will then ask for your verbal or written permission to run your credit. 

There are occasions when someone will check your report through a soft inquiry. A soft inquiry is when someone runs a credit check for reasons outside of lending you money. It can also result from you checking your own report or authorizing monitoring services from companies like Equifax or Experian. Unlike hard inquiries, soft inquiries don’t count against your credit score. 

6 Factors Mortgage Lenders Consider on Your Credit Report

Although the individual factors vary, mortgage lenders want to ensure you have a history of responsible credit usage. Here are some of the factors mortgage lenders consider. 

Your Payment History

One of the first things mortgage lenders look into is your payment history. They want to ensure they will get their money back, and anyone with a history of neglecting payments is usually considered a risk. On the other hand, a history of paying your debt in full and on time reflects well on your ability to make mortgage repayments.

Your Credit Utilization 

Using too much credit can be a sign that you’ve taken on too much debt as it is. Many lenders prefer a credit utilization rate of no more than 30%. So, if you have a credit limit of $1000, aim to keep your balance at $300 or less. 

Your Debt to Income Ratio

Your mortgage lender wants to ensure you have enough money coming in to make your mortgage payments and take care of your existing debts. To do that, your lender will compare your income to your total debt amount and ensure you have enough funds to take on a new mortgage payment. 

The Length of Your Credit History

Another thing mortgage lenders consider is the length of time you’ve used credit. Lenders will view you as less of a risk if you’ve got several years of credit use. On the other hand, a short credit history will likely be a red flag. The lender won’t have enough information to determine your reliability and may decide that lending to you isn’t worth the risk. 

The Number of Recent Applications

While having multiple lines of credit reflects well on you, opening too many new accounts at once will give most lenders reason to deny your application. A prospective lender will likely view a sudden rush to open up new lines of credit as a sign of recent financial troubles. 

The Number of Negative Marks

Credit lenders are vested in ensuring their loans will be repaid. Negative marks make you appear riskier, and many lenders would instead prefer to work with a more reliable borrower. Negative marks include things like bankruptcies, delinquent accounts, and accounts in collections. Too many negative marks will likely prevent you from obtaining a loan or new line of credit. 

Equifax Doesn’t Count Medical Debt on Credit Report

Starting on July 1, 2022, as long as your medical debt is fully paid, it won’t be included in a credit report. Even if the debt has been on your report for years, TransUnion, Experian, and Equifax will no longer count it against your score. They will also give consumers a year to take care of outstanding medical debts before including them as part of their credit file. The change will make it easier for millions of prospective homebuyers to obtain a loan. 

We hope this article has answered all of your questions about the differences between a credit report and your credit score. Although the two are different, they both reflect on your credit history and reliability when it comes to securing a loan. We wish you the best as you work toward obtaining a mortgage to finance your dream home!