Your Credit

How credit influences your home financing options

One of the most important steps in buying a house is financing the purchase. Your credit is one of the first things that lenders examine when considering you for a loan. Making payments on time is the most important way to establish good credit. A pattern or history of frequent late payments can lead to a poor credit score that could negatively affect your ability to be approved for future loans, or result in home financing at a higher interest rate. Conversely, having a good credit score will let you secure a home loan at a lower interest rate.

How-to’s: Understanding Your Credit Scores

When you apply for a mortgage loan, one of the first things your lender will do is check your credit history, but they don’t read through your credit reports page by page. They get a snapshot of your credit called a credit score.

Fair Isaac Corporation is the company that compiles your credit scores based on the information in your credit reports.

You’ve probably noticed the use of plurals – scores, reports. That’s because there are three credit bureaus, along with Fair Isaac, that are under the jurisdiction of the Federal Trade Commission. The three bureaus are called Equifax, Experian, and TransUnion.

The credit bureaus operate independently and each collects its own data about your credit from banks, landlords, credit card companies, retailers, and other sources. Each credit bureau also has its own credit scoring methodology.

When Fair Isaac scores your credit reports, it creates a FICO score that will be anywhere from 300 to 850. The lender buys your credit score and determines how much of a risk you are based on how you handle your other financial obligations.

Credit scores impact your interest rate. According to an example by the Consumer Federation of America and Fair Isaac Corporation, a 720 FICO score can help a borrower qualify for a low 4.0% 30-year-fixed-rate mortgage. A different borrower with a 520 score will pay 6.5% or $2,400 more annually on a $100,000 loan.

Five areas of your credit can impact your FICO score:

1.Your payment history – about 35%

2.Your debt (how much you owe) – about 30%

3.Length of credit history – about 15%

4.New credit – about 10%

5.Credit mix – about 10%

How to improve your credit scores

Delinquent accounts, high debt-to-income levels, and numerous open lines of credit (credit cards with high limits) can all conspire to lower your scores considerably. In order to keep your credit scores high:

1.Pay your bills on time. Don’t worry if you’ve missed a payment; catch up and stay current.

2.Keep balances as low as possible on your credit cards.

3.Don’t move your credit from card to card. If a credit card company is charging you a higher interest rate than you feel is fair, contact them and negotiate a lower one or pay the card off in full.

4.Don’t open more credit cards than you need.

5.Credit card companies reward their good customers with higher loan limits. If you don’t want more credit with this company, call them and ask them to return you to your previous limit.

Having a high credit score may not only get you a lower mortgage interest rate but it could also speed up your mortgage approval process.

When you are being considered for a home loan, mortgage lenders will review your credit report, which displays your credit history and credit score. Your credit score, also called credit rating, is based on a summary of your overall credit history. It is shown as a number that provides lenders with a fast and objective way to predict how likely you are to repay a loan.

Lenders use your credit report to decide on the following:

Whether or not to approve you for a loan

The type of loan for which you qualify

The interest rate to charge you

The importance of good credit

Your credit history will follow you throughout your life. Therefore, making good credit decisions along the way will help a great deal when you’re ready to realize the dream of home ownership.

Getting a copy of your credit report

Under the Fair and Accurate Credit Transactions Act of 2003 you’re entitled to a free copy of your report, once a year, from each of the three credit bureaus — Equifax, Experian and TransUnion. Your free credit report should tell you what’s in your file both outstanding debts and those you’ve paid off, along with how well you’ve kept up with your payments and who has seen the information.