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YOUR CREDIT SCORE
Your credit score is a vital factor in determining most home loans. It is just as vital for you to understand not only how it can affect your loan, but also how you can improve your score, how to avoid negatively impacting your score, and even how to interpret your score.
For your benefit, I provide an overview of these topics below.
I am available to answer specific questions you may have regarding your credit scoring, and how this affects your loan qualifying power. Please feel free to contact me with your questions.
What Is A Credit Score?
When lenders evaluate your loan application – a process called underwriting. They judge your ability to repay by looking at your income and how stable your past earnings have been and your willingness to repay by looking at your past credit history. Generally speaking, someone who has made payments on time in the past will probably do so in the future.
Your score is based on your past payment history, the
amount of credit you have outstanding, the amount of credit you have available, and other
factors. According to Fannie Mae and Freddie Mac, two large investors in mortgage loans,
credit scores are a good predictor of whether a borrower will repay her or his
loan.
A credit score is just one of many factors lenders consider. Even when
a credit score is low, lenders try to find other factors to satisfy their underwriting criteria. Part of a mortgage professional's job is to package your loan application and documentation to satisfy the best lender for you.
What Is A FICO Score?
“FICO” scores are a type of credit score originally developed by Fair Isaac & Company. FICO scores use
credit bureau information to create a score which indicates how likely someone is to make their
loan payments on time. Millions of consumers’ credit bureau records were used to develop the computer model. FICO scores range from approximately 350 to 900. The higher the score, the lower the probability of default. The vast majority of borrowers fall between 600 and 750. Most lenders use the middle of your three scores.
How Can Credit Scores Affect The
Price Of Your Loan?
Just as credit scores are one factor in determining if you qualify for a loan, they may also be a factor in determining the price of your loan, meaning the interest rate and the points charged by the lender.
Applicants with lower credit scores may pay higher prices for their loans because of the higher risk of default on the loan. Many home loans are sold to investors, and investors will pay a more favorable price for loans they feel have a low risk of default. Fannie Mae and Freddie Mac use credit scores as part of their analysis when pricing loans they buy from lenders.
How Can I Improve My Credit Score?
Because each borrower’s credit score is a reflection of his or her unique credit profile, it is not
possible to quantify in advance exactly how each item in your credit history impacts your credit
score. We know that there are things you
can do to improve your credit profile. Some of these factors include
- Making Timely Payments. Making your payments on time is the best way to increase your
score. Delinquencies, foreclosures, bankruptcies and judgements will decrease your score.
- The Number of Trade Lines. The number of credit cards, lines of credit and other types of
credit (“trade lines”) you have available will affect your score. If you have a lot of trade lines,
this may decrease your score because of the risk that you might not be able to pay off all of your
accounts, and this may affect your ability to pay off your mortgage loan. You may wish to
consider canceling credit cards you do not use regularly or choosing 2-4 cards to use and
canceling the rest.
- If you close or cancel an account voluntarily, it will not have a negative effect
on your credit score. You may wish to reconsider accepting “pre-approved” offers for credit
cards, or if you accept an offer, perhaps you should cancel another credit card. Lenders generally
want to see that you have at least 3 lines of credit and that you can handle your credit wisely.
How You Use Credit.
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The amount outstanding on each of your credit cards will also affect your
score. In general, the lower the amount outstanding, the more likely it is that your score will be higher. Using more than 45% of your allowed limit on any card may drop your score, even if you pay the entire bill in the first month.
- Do Not Apply For Credit You Do Not Need. Whenever you apply for credit, the creditor will
obtain a credit report from one or more of the three credit bureaus. Each credit "inquiry" will stay
on your record for at least a year and will affect your credit score. Even if you are turned down for the credit or change your mind and withdraw your application, your credit score will be affected. This is
because each inquiry suggests that you are increasing the amount of credit available to you.
Before you give your Social Security Number to someone, make certain you know how they are
going to use it. Resist the sales person who offers a "special in the store" if you open a new card.
A Social Security Number is almost always required to run a credit report. But
don’t let the fear of inquiries stop you from shopping for the best deal when you need auto or
home financing. Recently, the credit bureaus have recognized that borrowers may apply for
credit at more than one place for the same transaction. Generally, the credit scoring companies will consider all auto or mortgage loan inquiries received within a 30 day period as one inquiry.
I always provide you with a copy of your credit report during the pre-qualification process.
I encourage you to review it for accuracy before I submit your loan application to the Lender. If you find any errors, correcting them prior to submitting your loan application may result in a better likelihood your application will be approved and also that the time for approval will be lessened.
How To Correct Mistakes On Your Credit Report.
Because credit scores are based upon your credit record, it is very important that you obtain a
copy of your credit report from once a year to make certain the information is accurate. If the
information is not accurate (for example, someone else with a similar name may have accounts on your report), you should immediately take steps to get it corrected. No one
can do this but you.
Lenders, credit card issuers and other credit providers send regular reports about their accounts
to the major credit bureaus. This is where the information on your credit report comes from.
There are three major credit bureaus; you should contact each one because not all providers of
credit report to each bureau. Also, if you have joint credit (for example, if you are married and
have joint accounts with your spouse), it is a good idea to get the credit report for each of you
because there may be information on one report that does not appear on the other. If you ask for
a copy of your credit report to check your credit history, it will not affect your credit score.
You can reach the main credit bureaus at the following phone numbers:
Equifax: 800-685-1111
TransUnion: 800-888-4213
Experian (TRW): 888-397-3742
If you find errors on your report, you have the right to contact the credit reporting agencies and have this information corrected. Generally, you must write the credit bureau and advise them of the error or dispute. You may need to provide proof that the bill was paid or other information about the claim or dispute. The credit bureau will then contact the provider of credit who reported the information, and that the
provider will have 30 days to respond. If the provider of credit agrees that there is an error, it
will instruct the credit bureau to delete the item from your credit report.
You should allow at least 60 days after you have notified a credit bureau of an error in your
credit report for that error to be investigated and resolved. It may take longer depending upon
the nature of the error and the investigation to be done. I can often help speed this process. Please call me for details.
Materials To Review.
Listed below are some of the materials to help you understand more about
credit scores and solving credit problems.
Fair Isaac & Company; 120 North Redwood Dr., San Rafael, CA 94903
Answers to Your Questions About Credit Scoring: A Consumer’s Guide to Scoring
http://www.fairisaac.com
Board of Governors of the Federal Reserve System; Washington D.C.
Bulletin, Volume 82, Number 7, July 1996 “Credit Risk, Credit Scoring and the Performance of
Home Mortgages”
Freddie Mac; 8200 Jones Branch Dr., McLean CA 22102; 800-FREDDIE
Credit Scores: A Win/Win/Win Approach for Homebuyers, Lenders and Investors
Automated Underwriting: Making Mortgage Lending Simpler and Fairer for America’s Families
http://freddiemac.com
Office of the Comptroller of the Currency; Washington D.C.
Bulletin 97-24: Credit Scoring Models
Federal Trade Commission; Washington D.C.
http://www.ftc.gov/bcp/conline/pubs/credit/scoring.htm
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