Thinking about owning a home, but concerned about your credit? Here are some tips and information to help you get and maintain the best credit possible.
How credit and credit scores affect a mortgage borrower
If you haven’t looked at your credit report recently, it is definitely worth doing so. Knowing what’s on your credit report can potentially save you thousands of dollars if you plan to purchase and finance real estate soon. Mistakes, errors and unknown negative items can cause your credit score to drop, potentially exposing you to higher interest rates, delayed or even declined mortgage financing. Correcting errors and disputing things on your credit report can take time and effort, so it pays to start early and not wait until you are under contract to purchase a home.
What is credit scoring?
Credit scoring is a way lenders and other industries determine a potential borrower’s credit-worthiness and the likelihood of repayment. Fair, Isaac and Co (FICO) pioneered the concept of credit scoring in 1956, and is still the industry’s leading source for credit scoring. The numerical FICO score ranges from 300-850, and is based on factors including payment history, debt utilization, length of credit history, types of credit and number of credit inquiries, among other factors. The higher your FICO score, the more likely you are to be approved for a loan, and the better interest rate you’ll get. The following image shows the main five factors and their respective weights.
The biggest factor is your payment history. Consistently making your consumer debt payments on time is the best thing you can do to maintain great credit. Late payments, collections, charge-offs and judgments or liens can really damage your credit. The next factor is the amount of consumer debt owed, and the percentage of your revolving debt limits that is currently outstanding. Try not to let your revolving credit accounts get “maxed out”, as that really lowers your credit score. Try to keep your outstanding balances below 30% of the maximum limit if possible, and paying the entire balance off monthly will minimize your interest expense too .
The next three factors carry less weight than the first two, but are still important. The length of time you’ve had credit is important, so consider keeping older, well-established credit lines and accounts, rather than closing them. They will help your credit profile to show historic “depth”. The types and balance of credit also affects your score. Lastly, the number of inquiries into your credit and excessive applications for new credit can bring your scores down. Don’t worry about multiple credit pulls from similar providers when shopping for big ticket items like a mortgage or vehicle. The FICO scoring software counts multiple credit pulls from the same type of lender within a short period of time (typically 30 days) as one inquiry.
The three national credit repositories, Equifax, TransUnion and Experian all have slightly different formulas and weights they assign to the various factors. Consumers will typically have 3 FICO scores: one from each of the national credit bureaus. Conventional and government mortgage lenders use the lowest middle FICO score of the applicants as the “official” score for qualifying purposes. They set minimum FICO scores, with most conventional loan products requiring a minimum score of 620-640, and some government mortgage loan programs going as low as 580-600. If you plan to purchase a home in the near future and get a mortgage, it is well worth the time and effort to make sure your credit score is as high as possible.
We here at Everist Mortgage want to help you get the best mortgage financing terms possible, and help you get prepared to buy and finance a home. Getting pre-approved before you start shopping for a home can help you find out if there are any errors or unkown negative items on your credit when we have enough time to help you dispute and remove them. While we are not a credit repair company, we have the experience of looking at thousands of credit reports over the years, and know how to counsel you on creative ways to improve your credit. We also have access to resources and contacts within the industry that can help you improve your credit strategically to position yourself for the best financing terms available when you’re ready to buy a home. Give us a call for a free, no-obligation consultation about your credit and financing options. It will be well worth your time!
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