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Understanding Your FICO Scores and How it Affects Home Buyers
Home buyers who are seeking a mortgage find out early-on that their credit score plays an important part in the home buying process and in determining the interest rate that a lender offers. Credit scores only consider the information contained in your credit profile. They do not consider your income, savings, down payment amount, or demographic factors like gender, race, nationality or marital status. Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of inquiries are all considered in credit scores. Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your score
What is a credit score?
A credit score is a number that lenders use to estimate risk. There are three main credit bureau that rate you and give you that fico score. They are experian, Equifax, and Transunion. Each one of them operate seperately and have their own formula for determing a credit score. Your scores will most likely be different from each company because they may not have all the same information or they may place more value on certain items. Credit scores range from 350 - 850. Experience has shown them that borrowers with higher credit scores are less likely to default on a loan.
How are credit scores calculated?
Credit scores are generated by plugging the data from your credit report into software that analyzes it and cranks out a number. The three major credit reporting agencies don't use the same scoring software, so don't be surprised if you discover that the credit scores they generate for you are different.
Why are credit scores sometimes called FICO scores?
The software used to calculate a great number of credit scores was created by Fair Isaac Corporation--FICO.
Which parts of a credit history are most important?
Here is a breakdown of the approximate value that each aspect of your credit report adds to a credit score calculation.
Use these percentages as a guide:
35% - Payment History
30% - Amounts You Owe versus your credit limit
15% - Length of Your Credit History
10% - Types of Credit Used
10% - New Credit
Your Payment History Includes
- Number of accounts paid as agreed
- Negative public records or collections
- Delinquent accounts:
- total number of past due items
- how long you've been past due
- how long it's been since you had a past due payment
What You Owe:
- How much you owe on accounts and the types of accounts with balances
- How much of your revolving credit lines you've used--looking for indications you are over-extended
- Amounts you owe on installment loan accounts vs. their original balances--to make sure you are you paying them down consistently
- Number of zero balance accounts
Length of Credit History:
- Total length of time tracked by your credit report
- Length of time since accounts were opened
- Time that's passed since the last activity
- The longer your (good) history, the better your scores
Types of Credit:
- Total number of accounts and types of accounts (installment, revolving, mortgage, etc.)
- A mixture of account types usually generates better scores than reports with only numerous
revolving accounts (credit cards)
Your New Credit:
- Number of accounts you've recently opened and the proportion of new accounts to total accounts
- Number of recent credit inquiries
- The time that's passed since recent inquiries or newly-opened accounts
- If you've re-established a positive credit history after encountering payment problems
- In general, checking to make sure you aren't attempting to open numerous new accounts
When you open a new account or had recent inquiries it is a negative on your credit report because all of the information may not be available to the credit reporting companies. You may have opened ten credit cards, a car loan and it has not been reported to the credit bureaus. They drop you score because of the unknown factor.
Credit scoring software only considers items on your credit report. Lenders typically look at other factors that aren't included in the report, such as income, employment history and the type of credit you are seeking.
What's a Good Credit Score?
Credit scores (usually) range from 340 to 850. The higher your score, the less risk a lender believes you will be. As your score climbs, the interest rate you are offered will probably decline.
Borrowers with a credit score over 620 -640 are good borrowers. They usually meet many of the programs available and get good rates.
Borrowers with a credit score over 700 are excellent borrowers. They are typically offered more financing options and better interest rates, but don't be discouraged if your scores are lower, because there's a mortgage product for nearly everyone. Again this is supposed to change in the near future.
Borrowers with a credit score under 600 are credit blemishes or credit issues. If you have credit under 600 here are tips to raise your credit score.
Borrowers with a credit score under 500 have a problem getting a mortgage of any type. Under 500 score means that you have a greater history of never paying any loan back.
Multiple Credit Scores
Your bank will pull credit reports and scores from all three major credit reporting agencies: Transunion, Equifax and Experian. They'll probably use the middle score to work your loan application. Ask your lender to explain which credit scores will be used and how they affect your loan application.
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The most important factor for a good credit score is paying your bills on time. Even if the debt you owe is a small amount, it is crucial that you make payments on time. In addition, you may want to: keep balances low on credit cards and other "revolving credit;" apply for and open new credit accounts only as needed; and pay off debt rather than moving it around. Also don't close unused cards as a short-term strategy to raise your score. Owing the same amount but having fewer open accounts may lower your score.
Recent changes minimize the negative effects that rate shopping can have on a mortgage applicant. If there is a consumer originated inquiry within the past 365 days from mortgage or auto related industries, these inquiries are ignored for scoring purposes for the first 30 calendar days; then, multiple inquiries within the next 14 days are counted as one. Each inquiry will still appear on the credit report.
Every score is accompanied by a maximum of four reason codes. Reason codes identify the most significant reason that you did not score higher. The reason codes can help a lender describe the reasons for higher than expected rates or loan denial. Scores are not part of the credit profile and are not covered by the Fair Credit Reporting Act.
Your credit report must contain at least one account which has been open for six months or greater, and at least one account that has been updated in the past six months for you to get a credit score. This ensures that there is enough information in your report to generate an accurate score. If you do not meet the minimum criteria for getting a score you will have to get a FHA Loan or may need to put up a bigger downpayment. It is best to establish a credit history prior to applying for a mortgage.
If you want more information about credit scores from a credit bureau go to Credit Karma
If you have any more questions about your ability to obtain a home Loan please call us at (248)310-6239
Sincerely,
Russ Ravary
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