SCORE!
Are you thinking about buying a home? Or know someone who is? Compared with a few years ago, today's lenders are looking for higher credit scores to approve mortgages and to offer the best rates. Getting the best interest rate on a mortgage means qualifying for a larger loan amount or a smaller monthly payment.
Many of our clients today are looking to move -- or are helping a family member buy a home in today's market. No matter if you are the buyer -- or you're helping an adult child or grandchild or niece, nephew, in-law or other relative -- knowing the new rules of credit is critical. That's why it's more important than ever for you or any borrower to keep a close eye on credit reports and do everything to improve one's credit score.
What's The Score?
Your credit score is an objective measure lenders use to assess your creditworthiness. It summarizes a number of different types of financial behaviors that can help predict whether you are likely to meet your repayment obligations. Information about you comes from the "Big Three" credit reporting agencies -- Equifax, Experian and TransUnion -- which receive reports from creditors (usually monthly) about how you pay your bills, what type of accounts you have, etc. That information is compiled and updated in your credit report.
Your credit score is developed using a mathematical formula that "weighs" various types of information in your credit report, depending on how well each type of information tends to predict credit behavior. For example, defaulting on a loan will affect your credit score a lot more than, say, two 30-day-late payments.
The scoring model most commonly used by lenders comes from FICO (formerly known as Fair Isaac & Co.). There are other scoring models, however.
What's Possible?
FICO scores can range from a low of 300 to a perfect score of 850, but some other models have slightly different ranges. Because not all lenders and credit agencies use exactly the same scoring model, your score can be different from one to another. In addition, credit reporting agencies may not all have exactly the same information about you, so that even if they use the same scoring model, the differing sets of input data will produce somewhat different scores. It's not uncommon for lenders to pull scores for you from all three reporting agencies to compare.
What's Good?
It's up to individual lenders to define what they consider to be a good credit score. As of mid-July this year, FICO reported that, on a national average, FICO scores of 760 and higher earned the lowest interest rates for a 30-year mortgage. Scores of 700 to 759 earned the next lowest rate. If you score below the mid-600s, you can expect to pay significantly higher interest rates and have greater difficulty getting credit.
Can It Change?
Credit scores change all the time, reflecting your changing balances, payments, etc. What's better: You can improve your score by understanding how the scoring models work. Although more than 100 variables are used in calculating your credit score, there are five major categories of important credit information reflected in a FICO score, as ranked below in order of importance:
- Late payments, delinquencies, bankruptcies -- about 35% of your score. Failing to pay creditors as scheduled is a red flag to lenders. What guarantee do they have that you won't do so again? The more recent a late or missed payment is, the more it will affect your score, since it implies a current trend that could affect the new lender.
Tip: If you can't make a payment, or if you've missed one by accident, notify the creditor immediately to see if something can be worked out to keep the incident off your credit report.
- Outstanding debt -- about 30%. People who are heavily extended with too much outstanding credit tend to be higher risks than those who use credit conservatively. For example, someone using 75% of his or her available credit represents a greater risk than someone who is using only 20%.
Tip: Pay down balances to keep credit use below 20% of your credit limits. Limit the number of open credit accounts to less than five or six.
- Length of credit history -- about 15%. The longer your credit history, the better. Still, having a relatively brief record of credit doesn't automatically mean higher risk. What carries the most weight is how you pay bills and how extended you are on your available credit.
Tip: If you're thinking of closing some credit accounts, keep the oldest ones open to show a long (and good) track record. Note, however, that closing an account will not remove it from your credit report, at least for several years.
- New applications for credit (inquiries) -- about 10%. When you are shopping for credit -- mortgage, car, credit card, etc. -- lenders will inquire about your credit history (only with your permission, of course). While a single lender inquiry could lower your score slightly, say by 5 points, a number of inquiries for different types of credit could lower your score much more. The reason: Lenders may suspect other credit obligations exist that have yet to appear on your credit report, or that you've been rejected by other lenders.
Tip: Don't apply for credit accounts while you are trying to secure mortgage financing or before your mortgage is closed/settled. Also, to minimize the impact on the credit score, FICO recommends that consumers shopping for a particular type of credit should concentrate their efforts so all credit inquiries show up in a fairly compressed time frame -- not longer than 45 days -- and can be related to a single reason, such as a home purchase or refinancing.
- Other factors -- about 10%. Some minor factors can also influence your score. For example, the FICO model adds points for having a mix of credit types, such as installment loans, credit cards and lines of credit (provided, of course, they've all been handled responsibly).
Is It All About The Score?
Actually, lenders look at more than just your credit score when evaluating your loan application. Once your application is complete, it is usually examined by an automated underwriting system and by actual human beings! Both Freddie Mac and Fannie Mae (the nation's two largest mortgage funding entities) advise lenders that applications should not be approved or declined based only on credit scores.
Just as you regularly take care of your health, your home and your car, make sure your credit stays in good repair by checking it periodically and attending to any problems or inaccuracies right away. Doing so could make all the difference when it comes time for you to buy a home.
Check Your Credit Reports
You are entitled to one free credit report annually from each of the major credit reporting companies -- Equifax, Experian, TransUnion. To request your reports, go to www.AnnualCreditReport.com or call (877) 322-8228.
 For the uninformed, blogging is hitting the Internet today and making a real impact! What is a blog? An easy explanation of this is a WEB LOG or a journal on the web … it’s a place where folks can “voice” their thoughts, share ideas, or comment on those of others. The Chapel Hill, Carrboro and Durham area now has such a blog where new items of interest will be posted and where comments can be made. Topics can range from those related to real estate and community highlights to local events of interest or anything personal or business related that might be perceived as worthwhile information for public knowledge, discussion and/or use. It’s even possible to subscribe to a blog of interest and receive textual updates on your iPod! Check out the latest updates for the Chapel Hill, Carrboro and Durham at:http://www.thesmartmoveteam.com/blog.asp
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