In today's increasingly automated society, it should come as no surprise that when you apply for a mortgage, your ability to pay can be reduced to a single number. All the years you've been paying your mortgage, car payments, and credit card bills can be analyzed, sliced, diced, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.

All three of the major credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a score. The best known is called the FICO score, based on a model developed by Fair Isaac and Company and used by Experian. Equifax's model is called BEACON, while TransUnion uses EMPIRICA.

FICO scores are simply repository scores meaning they ONLY consider the information contained in a person's credit file. They DO NOT consider a person's income, savings or down payment amount. Credit scores are based on five factors: 35% of the score is based on payment history, 30% on the amount owed, 15% on how long you have had credit, 10% percent on new credit being sought, and 10% on the types of credit you have. The scores are useful in directing applications to specific loan programs and to set levels of underwriting such as Streamline, Traditional or Second Review. However, they are not the final word regarding the type of program you will qualify for or your interest rate.

While each of the models considers a range of data available in your credit report, the primary factors are:

Credit History - How long have you had credit?

Payment History - Do you pay your bills on time?

Credit Card Balances - How much do you owe on how many accounts?

Credit Inquiries - How many times have you had your credit checked?

Scores:

• A borrower with a score of 680 and above is considered an A+ borrower.
• A score below 680 but above 620 may indicate underwriters will take a closer look in determining potential risk.
• Borrowers with credit scores below 620 are not normally locked into the best rate and terms offered.

The following items are some of the ways that you can improve your credit score:

• Pay your bills on time.
• Keep Balances low on credit cards.
• Limit your credit accounts to what you really need. Accounts that are no longer needed should be formally cancelled since zero balance accounts can still count against you.
• Check that your credit report information is accurate.
• Be conservative in applying for credit and make sure that your credit is only checked when necessary.

There are other factors in addition to you credit score that will affect your ability to buy real estate.  Should you need assistance understanding these factors or are interested in getting in contact with a mortgage professional, please don't hesitate to contact me via my website at www.HalliEckhoff.com.