Credit Scores

How Your Credit Score Can Affect Your Ability to Finance a Home

Whether you are a first-time home buyer or you are planning to refinance your existing home loan, it is important to understand how your credit history influences the process.  When you are being considered for a loan, the lender looks at your past payment history, the amount of credit you have outstanding and the amount of credit you have available - a snapshot of you as a borrower.

Several years ago the major credit repositories developed models whereby consumers are rated, based on information being reported to them.  Mortgage lenders rely on a consumer's credit scores, such as a FICO score developed by Fair, Isaacs & Company, and use a combination of FICO score and other factors when considering each loan application.  FICO scores range from approximately 350 to 850, and, in general, higher scores predict timely mortgage payments.

The applicant's credit history may directly affect the interest rate and fees (or points) a lender charges.  Consumers with the best credit generally pay the lowest amount for a home loan.  Building and maintaining strong scores may be as simple as improving your credit profile.  Recommendations for doing so include:

• Making timely payments each month - it may seem obvious, and the payment history makes up about 35% of your scores.  
• Limiting the amount of credit you use - keeping low balances relative to credit limits raises credit scores, and accounts for about 30% of your scores.
• Numerous credit accounts - available credit is generally good for your credit scores.  Closing accounts, especially when there is still a balance, is never a good idea.  Accounts that haven't been used for several years should be used again.  Newly opened accounts, though, will temporarily reduce your scores.
• Not applying for credit you don't need - whenever a creditor checks your credit history, it is noted on your report, and each such inquiry stays on your record for several months.  Inquiries within 14 days of each other for the same type of account should not affect your scores, but numerous credit checks from a variety of lenders will cause scores to drop.
• Clearing up derogatory information - accounts past due, collections, charge-offs, bankruptcies, tax liens, and such, appear on credit bureau files, adversely affecting scores.  Correcting the information raises the scores.
• Checking your credit reports periodically - obtaining a report yourself usually won't count as an inquiry.  The three major bureaus who provide reports for a small fee are Equifax (800-405-0081), Experian (800-682-7654) and Trans Union (800-888-4213).

For more detailed information about credit scoring visit: www.myfico.com.

While it may seem intimidating at first, understanding and improving your credit scores may be easier than you think.  The time and effort you invest can pay off handsomely in lower home loan rates, lower monthly housing expenses, and better loan terms.