All about Credit Ratings for Homebuyers and the Factors that Contribute to Your Credit Score
Whether you are purchasing your first new home, vacation or investment property, or refinancing an existing home, your credit score is one of the major considerations your lender will use toward qualifying you for a mortgage.
Your credit score and your credit hostory is reviewed by your lender to determine your ability to repay the loan and to judge the amount of risk they may take if qualifying you for a loan. The higher your credit score is, the lower a risk you are to the lender.
Knowing what your credit score is prior to moving into the mortgage process can significantly streamline the loan process. If you do not know what your credit score is, your Poli Mortgage Group Loan Officer can obtain a credit report on your behalf.
Poli Mortgage Group recommends that you do not search for your credit score from an on-line website. There are a number of sites available that will provide you with a score, but these sites do not report based on the three reporting credit bureaus that mortgage lenders require.
Credit Score Factors
Credit Scores, also known as FICO Scores, can range anywhere from 300 – 850 with 850 as the best possible score. Your credit score is monitored and reported by three separate reporting credit bureaus; Equifax, Trans Union and Experian.
A recent FICO score distribution model (by Equifax, Inc – based on a nationwide sample of consumer credit data) suggests that credit scores are trending down in general from April 2008 through April 2010. This same analysis shows that as of April 2010, 65% of the survey population had credit scores between 650 and 850. In 2012 credit scores are improving on a National Basis.
Your credit history begins when you apply for credit which then initiates a “credit inquiry” to the credit bureaus. Credit Scores are determined using five areas of information.
- Payment history = 35%
- Open Accounts & Balances = 30%
- Length of time account(s) have been open = 15%
- Types of credit used = 10%
- Credit Inquiries = 10%
If you have delinquencies in your credit history, it will have an impact on your credit score. To give you a sense of approximately how the length of time since your last major delinquency can negatively impact your credit score, a few examples are as follows:
- 93% negative impact on your score if during the last year
- 60% negative impact on your score if between 1-2 years old
- 44% negative impact on your score if between 2-3 years old
This negative impact on your credit score can improve over time. Bankruptcy can stay on your credit report for up to 10 years but you may be able to acquire additional credit after a 2 year timeframe has passed.
Most residential mortgage programs today, allow borrowers to qualify with a credit score of 640 or higher. It is important to mention that, the higher your credit score is, the lower your interest rate may be along with a broader range of loan program options (different loan programs require different credit scores).
Managing your Credit Score
If you have little or no credit history you will need to establish at least two lines of credit (credit card, auto loan, etc), for at least 6-12 months making all payments on time. During the time you are building credit history, try to keep your account balances below 30% of your credit limit and limit any credit inquiries.
Any time you apply for a credit card, purchase a car or other large item purchased with credit terms is considered an “inquiry” on your credit report.
In some circumstances and with the right home loan program (FHA) they may accept your payment history on non-traditional items such as utility, cell phone, and insurance bills.
If you do have credit history, once you receive your credit report, you should review the report in detail to ensure there is no erroneous information listed. If there is, you should immediately contact that creditor to discuss and correct the situation with the credit bureau(s) via a written inquiry of dispute.
If it is agreed that there are errors on your credit report, you should request a written correspondence from the credit bureau as it may take 30 to 45 days for them to investigate and report back to you. Your Poli Mortgage Loan Officer can also help or advise you how to handle a dispute.
When shopping for your home loan and you are mortgage shopping, your “pre-approval” requests within a one-two week time span as each credit pull counts as an inquiry.
To maintain a good credit score, you should not do the following as it can lower your score, and in some cases significantly.
- Make late payments (even one month)
- Max out your credit cards
- Close credit cards you have not used for some time
- Open new credit cards in a short time frame
- Continuously transfer monies between your credit cards to obtain rate "advantage"
Improving your Credit Score
The most obvious way to improve your credit score is to pay all your bills on time as your payment history is one of the major components that make up your score. If you are having difficulty managing your debt, you should contact your creditor(s) and request a modification of your monthly payment. .
Additionally, to improve your score, not only should you pay your monthly bills on time, but try not to have the balances be more than approximately 30% of your total available credit. There are reputable credit repair companies that can assist you in improving your credit scores. Ask your Poli Mortgage Loan Officer to recommend one or they can request assistance on your behalf.
Most of these companies will provide you with a report which has been analyzed and identifies opportunities and recommends the course of action necessary to increase your score.