Mortgage Library

Resouces to educate the borrower on their mortgage needs.

Rate your Credit - How's your FICO?

It may come as no surprise that in our automated society when you apply for credit, including a mortgage, your ability to repay the loan comes down to a single number. Every bill that you've been paying on time like a mortgage, car payment, and credit cards can be broken down and analyzed into a simple formula indicating whether or not you will be able to meet your future financial obligations.

Every major credit reporting agency (Equifax, Experian, and TransUnion) uses a slightly different method of figuring your score. The best known risk-based numerical credit system is called the FICO score, developed by Fair Isaac & CO. This method is used by many mortgage lenders to determine the possibility that a borrower may default on their financial obligations. The major factors playing into your FICO score include:
 

  • Payment track record - Consisting of 35% of your total score, lenders like to see that you've paid all of your bills on time for the past seven years.
  • Outstanding credit - The second largest factor, 30%, measures your credit utilization ratio. These numbers measure the outstanding balance on your available credit.
  • Credit History - Comprising of 15% of your score, it displays your history of credit with various lenders and accounts.
  • Credit inquiries - Almost 10% of your score is based around the number of times lenders have made inquires about your credit in recent months.
  • Debt mix - The trailing 10% is based on whether you have incured debt and made those payments in a timely manner. These payments include various credit such as: credit card debt, a car loan, or a mortgage.

 
Of these values and weights, a numerical formula is derived and the result is a FICO score between the value of 300 and 850. The higher the number, the better your borrowing power. The typical homebuyer falls into the category between 600 and 850.

So what can you do about your credit score? Unfortunately, it's not as easy as you'd think. So much of your credit is a direct reflection of your past financial history. However there are many strategies that may improve your score:
 

  • Pay all of your bills on time.
    If it happens that you are unable to pay your bill when it's due immediately contact your lending insitution and see if they are able to work with you for a more suitable payment schedule. If you check your credit report and there are late notices, ask the lender to remove the notice. This is easier if you have good credit.
  • Reduce your credit utilization ratio.
    You can improve your score if your outstanding debt balace as compared to your available debt is lower. Keeping your ratio under 50% will position you for a better score. If you are unable to pay down your debt ask your lender to increase the credit available to you. This will have the same results as paying down your debt, however be aware that it will not help you if you end up using that additional credit.
  • Don't close every credit card you have.
    Closing out a card will increase your credit utilization ratio because you will have less available credit. If, however, you have too many credit cards, close only the newest ones. Too many cards will make your lenders uneasy.
  • Minimize request for additional credit.
    Inquiries regarding additional debt appear in your credit report. Too many inquiries will adversely affect your credit.

An important way to keep a clean credit report is to focus on the details and regularly check your credit report. A yearly check on your credit information is recommended.

Check Your Credit Information and a Credit Score for FREE!

Conveniently, the three credit bureaus that report your credit score will let the you examine the information anually at no cost. You can follow the link to www.annualcreditreport.com. This will provide you all the reported information that affects your score.

You can also obtain a single score from TransUnion through www.creditkarma.com for free. Please understand that for loan purposes all three bureau's scores will be used, and that scores vary day by day. However, if the credit information is reported the same to all three bureaus (check the info at annualcreditreport.com), you can be rest assured that your qualifying credit score for a loan will be relatively close to the score given by www.creditkarma.com.

Armed with this information, you will be a more informed consumer and better positioned to obtain the most favorable mortgage available to you.

Equifax
1-800-685-1111
www.equifax.com
Experian
1-888-397-3742
www.experian.com
TransUnion
1-800-888-4213
www.transunion.com