Miles to Memories, ESR Media, LLC & the author are not credit providers and do not provide personal financial or professional advice or credit assistance. The information published in this article is of a general nature only and does not consider your personal objectives, financial situation or particular needs. Consult a professional.
Mortgage Primer for Credit Card Churners
Getting a mortgage is truly one of the most stressful things one can do. I know that is sort of a cliché, but in most cases it is absolutely true. Mortgages, especially when you are purchasing a home, involve so many moving pieces. Those pieces combined with a ton of regulation, mean that mortgage loans are anything but simple.
I worked for a mortgage company for a few years and mortgage is sort of the family business as well. Even though I no longer work in that industry (and haven’t for awhile), I am always caught up to date with the latest happenings at birthday parties, holidays and just about any other time the family gets together. It is an interesting world to me, especially given the credit aspect of what I cover on Miles to Memories.
Different FICOs for Different Purposes
Yesterday I covered how to check your free FICO score at each of the major banks. I think knowing your score is important, since credit is truly one of the most powerful and important things in modern American life. Unfortunately, your score can change and differ depending on which bureau’s data is used and which scoring model is used.
Then, there is another factor as well. Depending on what type of credit you are applying for, a different version of the same scoring model might be used. For example, credit card issuers use the Bankcard Score 8 model while auto lenders will use the Auto Score 8 model. Then there are mortgage lenders who use a completely different model altogether. You can find an interesting chart with all of the different models at myFICO.
The Tri-Merge Mortgage Report
While there will be some differences between banks, generally most banks use a “tri-merge” credit report for mortgages. This report takes data from all three of the credit bureaus (Experian, Equifax, Transunion) and merges it together. What it doesn’t do is merge your scores. A tri-merge credit report will include three scores, one from each of the bureaus.
If you have ever obtained a mortgage then you know that they use a singular “credit score” when qualifying you. So how do they get this? You might think it is some sort of average of the three scores or a formula, but it is generally much simpler than that. What they do is drop the lowest and highest scores and simply take the middle one. This is really good if you have a ton of inquiries on one bureau which are dropping your score.
Speaking of inquiries, I know many of you worry about them a lot. I have written before how you can check which bureau each credit card bank pulls from and I suggest using that information to “load balance” your inquiries. Of course this article is about mortgages and I think it is important to note that there is a big difference between inquiries on a credit card report and a mortgage report.
Again, this could vary by bank, but in most cases mortgage lenders only request inquiries for the past 120 days. This is good for people who may have a lot of inquiries, but remember they see inquiries across all three bureaus. If you have a lot of inquires showing on your report, be prepared to explain to the underwriter why you applied for so much credit. Generally they will ask for a letter.
Funds & Bank Accounts
When applying for a mortgage, a bank will ask you to list your assets. They use this information to determine the source of a down payment (if applicable) and closing costs. They also take into account the amount of reserves you have in determining your strength as a borrower. When looking at reserves, a bank will generally go through your statements in order to look for irregularities. They must be able to determine the source of the funds and if they see anything abnormal they may disqualify the money or ask for a letter of explanation.
If you are an MSer, then no doubt you have bank accounts that look strange. The good news is that you can separate your MS activities from your personal activities and be alright. That is because generally you don’t have to include all of your assets on a mortgage application. Of course if you need all of your assets to qualify then you may have a problem, but if you have enough money in your normal accounts, then you may be able to avoid problems by leaving your complicated accounts off of the application.
Letters of Explanations
One of the tools the underwriter uses to cover themselves is a letter of explanation. Of course this is up to their discretion, but any irregularity will generally be met with a condition for the borrower to write a “letter of explanation”. This is a very common thing and generally doesn’t mean anything. They just want to show the investor (yes mortgages are investments) that they thoroughly went over everything.
Letters of explanation can be required for all sorts of things. For example, I have seen letters for everything from gaps in employment to large deposits. If you have opened and closed a lot of credit accounts, then you may be asked to write a letter explaining why. Usually a simple explanation such as, “I travel a lot and open rewards cards to maximize my value” will work.
Getting a mortgage is stressful under normal conditions, but if you have a lot of accounts like many of us, it can cause a few hiccups. With that said, if you have steady income, assets and a good credit score, then you generally won’t have anything to worry about. If you are planning to get a mortgage, it can be a good idea to plan ahead, avoid unneeded inquiries and make sure you document all deposits to make sure everything goes as smoothly as possible.