How your credit score plays a role in the home buying process:
Before they decide on the terms of your mortgage loan (which they base on their risk), lenders need to discover two things about you: your ability to repay the loan, and your willingness to pay back the loan.
To understand your ability to repay, they assess your income and debt ratio.
To assess your willingness to repay, they use your credit score.
The most widely used credit scores are called FICO scores, which were developed by Fair Isaac & Company, Inc.
The FICO score ranges from 350 (very high risk) to 850 (low risk). You can learn more on FICO here.
Credit scores only consider the information contained in your credit profile. They do not take into account your income, savings, amount of down payment, or demographic factors, like sex, race, nationality or marital status. Fair Isaac invented FICO specifically to exclude demographic factors like these.
Credit scoring was developed to assess a borrower's willingness to repay the loan, while specifically excluding any other demographic factors.
Your current debt load, past late payments, length of your credit history, and a few other factors are considered.
Your score is calculated wtih positive and negative information in your credit report.
Late payments count against you, but a record of paying on time will improve it!
Your credit report must have at least one account which has been open for six months or more, and at least one account that has been updated in the past six months for you to get a credit score.
This payment history ensures that there is sufficient information in your report to generate an accurate score.
Some folks don't have a long enough credit history to get a credit score. They may need to build up a credit history before they apply.
For information on how to receive your free annual credit report, click here: Getting Your Credit Report.
"How can I improve my credit score?"
It's virtually impossible to change your score in the time between when most people decide to buy a home or refinance their mortgage, and when they apply. So the short answer is, you really can't "on the spot." But there are strategies you can live with to make sure that when you apply for a loan, your score is as high as possible.
Make sure that the information each of the three credit reporting bureaus has on you is consistent and up to date.
Order a copy of your credit report about once a year, and dispute any inaccuracies.
Note: Theoretically, if a series of credit reports is requested on your behalf during a limited amount of time, your score goes down until time passes without any inquiries. Changes in the law, though, have made "consumer-originating" credit report requests not count so much.
Also, a series of requests in relation to getting a mortgage or car loan is not treated the same as a number of credit card requests in a limited time. This is because the credit bureaus, and lenders, realize that people request their own credit reports to keep up with what's on them, and smart consumers shop around for the best mortgage and car loans.
Unsolicited credit card solicitations in the mail don't count against your credit report, so don't worry.
The two main components of your credit score are your payment history and the amounts you owe.
Bankruptcy filings and foreclosures, which can stay on your credit report for as long as 10 years, can significantly lower your score. It's never a good idea to take on more credit than you can handle.
Late payments work against you. It's extremely important to pay bills on time, even if it's only the monthly payment.
Don't "max out" your credit lines. Since the size of the balance on your open accounts is a factor, lower balances are better.
It's said that by carefully managing your credit, it's possible to add as much as 50 points per year to your score.
Contemporary Mortgage Services, Inc. can answer your questions about credit reporting. Call us: 407-834-3377.