How is your credit?
How Is Your Credit?
Credit scores are one of the most important factors in qualifying for a mortgage loan. The higher your credit score, the more likely you are to qualify for a mortgage and the more favorable your interest and insurance rates will be. A borrower with good credit has:
- No unpaid judgments or liens
- No foreclosures within 10 years
- No bankruptcies within the last two years
- No unpaid bills
- No slow or late bill payments within twelve months prior to applying for a mortgage
- No delinquent child support obligations
If you don't have good credit, you don't have to give up on buying a home. We have counseling partners that will help you repair your credit so you can qualify for the best mortgage loan possible. Click here to be referred to a credit repair specialist.
It is preferable for a homebuyer to have at least four good credit references when qualifying for a loan. Traditional credit references include:
- Car loans
- Credit cards
- Student loans
- Personal loans
Sometimes, for those who have limited established credit, non-traditional credit references can be used, depending upon lender requirements. Non-traditional credit references can include:
- Rent payments
- Utility payments
- Phone payments
- Storage payments
- Title loans
- Car insurance payments
In general, when people talk about “your score,” they are talking about your current FICO® score. The term "FICO®" refers to a credit scoring system developed by Fair Isaac & Company. It was developed in the 1950’s as a tool lenders can use in determining the creditworthiness of the prospective borrower. It calculates the statistical likelihood that a borrower will or will not pay a debt. FICO® scores range from 300 to 850. The higher the score, the more attractive the interest rate the homebuyer will receive.
FICO® scores are believed to provide the best guide to future risk based solely on credit report data. The higher the FICO® score, the lower the risk of default. At the same time, no score can predict whether a specific individual will be a “good” or “bad” customer. And while many lenders use FICO scores to help them make lending decisions, each lender has its own strategy including the level of risk it finds acceptable for a given credit product. There is no single “cutoff score” used by all lenders, and there are many additional factors that lenders use to determine your actual creditworthiness and interest rate.
When you apply for a loan, you authorize your lender to ask for a copy of your credit report. This is how inquiries appear on your credit report. The inquiries section contains a list of everyone who has accessed your credit report within the last two years. The report you see lists both “voluntary” inquiries, spurred by your own requests for credit, and “involuntary” inquires, such as when lenders order your report so as to make you a pre-approved credit offer in the mail.
Three major credit reporting agencies, Equifax, Experian, and TransUnion, provide FICO® scores to lenders. FICO® scores have different names at each of the three credit reporting agencies. Credit reporting agencies also collect public record information from state and county courts and information on overdue debt from collection agencies. Public record information includes bankruptcies, foreclosures, suits, wage attachments, liens, and judgments.
Checking Your Credit Report
Potential homeowners should request a copy of their credit report before applying for a mortgage loan. You are entitled to a free copy of your credit report each year from all three credit reporting agencies. If there are inaccuracies or errors in your credit report, you can request that the credit reporting agencies review your credit report and make corrections. Your free credit report does not include your credit score. You can obtain a copy of your credit score separately, but you will have to pay a small fee.
Federal law requires each of the three nationwide consumer credit reporting companies - Equifax, Experian and TransUnion to give you a free credit report every 12 months if you ask for it. They also make it easy to accomplish many credit-related tasks right from your computer. You can access your free credit report at https://www.annualcreditreport.com.
You should make sure the information in your credit report is correct. Not only is your credit score based on this information, but lenders also review this information in making credit decisions. If you find an error, the credit reporting agency must investigate and respond to you within 30 days. If you are in the process of applying for a loan, immediately notify your lender of any incorrect information in your report. Your lender will need to reorder your credit report and score once any changes have been made to your credit file. Small errors may have little or no effect on your score. If there are significant errors, however, the lender may disregard the score.
Improving Your Credit Score
Raising your credit score takes time and there is no quick fix. In fact, quick fix efforts can often backfire. The best advice is to manage credit responsibly over a period of time. Click here to be referred to a credit repair specialist.
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