Credit Score
Typically a lender will request your credit report to obtain your credit score from all three credit-reporting agencies. The three credit reports are three separate charges and are put into one credit report fee. If you use a lender that uses Fannie Mae approved Desktop Underwriting software many of these costs are reduced. When your report comes in, the lender will compare the report against all of the other items that you reported on your initial application. Your FICO Scores find some; your scores will consider inquiries that fall in a typical shopping period as just one inquiry. For FICO Scores calculated from older versions of the scoring formula, this shopping period is any 14-day span. But, sooner than 14 days is more recommended. Generally we ask that you try and limit your shopping around to 3 or 4 lenders and that you seek your best deal within a 3-5 day period.
THE THREE CREDIT BUREAUS ARE:
Equifax – (800) 685-1111 www.equifax.com
Transunion – (800) 888-4213 www.transunion.com
Experian – (888) 397-3742 www.experian.com
WHY YOUR CREDIT SCORE IS SO IMPORTANT
The credit-scoring model seeks to quantify the likelihood of a consumer to pay off debt without being more than 90 days late at any time in the future. Credit scores have many different ranges, but the score that is used by 90% of lenders and creditors is the FICO score, and the FICO score range is between 300 and 850. Credit scores can range between a low score of 300 and a high score of 850. The higher the score, the better it is for the consumer, because a high credit score translates into a lower interest rate. This can save thousands of dollars in financing fees over the life of the loan. Only one out of 1300 people have a credit score above 800. These are people with a stellar credit rating that get the best interest rates. On the other hand, one out of every eight prospective homebuyer is faced with the possibility that they may not qualify for the home loan they want because they have a score falling between 500 and 600.
Credit scores are comprised of 5 factors. Points are awarded for each component, and a high score is most favorable.
THE FACTORS ARE LISTED BELOW IN ORDER OF IMPORTANCE:
- Payment History – 35% Impact. Paying debt on time and in full has the greatest positive impact on your credit score. Late payments, judgments, and charge‐offs all have a negative impact. Delinquencies that have occurred within the last 2 years carry more weight than older items.
- Outstanding Credit Card Balances – 30% impact. This factor marks the ratio between the outstanding balance and available credit. Ideally, the consumer should make an effort to keep balances as close to zero as possible, and definitely below 30% of the available credit limit at least 2‐3 months prior to trying to purchase a home.
- Credit History – 15% impact. This portion of the credit score indicates the length of time since a particular credit line was issued. A seasoned borrower will always be stronger in this area.
- Type of Credit – 10% impact. A mix of auto loans, credit cards and mortgages is more positive than a concentration of debit from credit cards alone. You should always have 1‐2 open major credit card accounts. 3‐5 open credit cards are optimal.
- Inquiries – 10% impact. This percentage of the credit score quantifies the number of inquiries made on a consumer’s credit within a 12‐month period. Each hard inquiry can cost from 2 to 25 points, depending on the amount of points someone has left in this factor. Note that if you pull your credit report yourself, it will have no effect on your score.
Remember that the credit score is a computerized calculation. Personal factors are not taken into consideration when a credit report is generated. It is merely a snapshot of today’s credit profile for any given borrower, and it can fluctuate dramatically within the course of a week.
DO’S AND DON’TS DURING THE LOAN PROCESS
When you apply for a mortgage, we pull a tri‐merged credit report which includes credit scores and creditor information from all 3 of the major credit reporting agencies (CRA’s): Equifax, Transunion and Experian. Each loan program has different guidelines and requirements. The borrower should not do anything to adversely affect their credit score while the loan is in process. It can be tempting…if you are moving into a new house, your might be thinking about purchasing new appliances or furniture, but this is really not the right time to go shopping with your credit cards. You will want to remain in a stable position until the loan closes. There is a 2nd credit check just prior to closing on every borrower, and if the second report reveals any new credit or any credit inquiries, it could cause a delay or potentially cause the loan not to close at all.
HERE ARE SOME PITFALLS TO AVOID DURING THE LOAN PROCESS:
DON’T APPLY FOR NEW CREDIT OF ANY KIND!
If you receive invitations to apply for new credit cards, don’t respond. If you do, that company will pull your credit and this will have an adverse effect on your credit score. Likewise, don’t establish new lines of credit for furniture, appliances, computers, etc.
DON’T PAY OFF COLLECTIONS OR CHARGE‐OFFS!
Once your loan application has been submitted, don’t pay off collections unless the lender specifically asks you to in order to secure the loan and it is recommended that you do everything possible to negotiate deletion of the account from the credit bureau in exchange for payment. Generally, paying off an old collection will cause the credit score to go down.
DON’T CLOSE CREDIT CARD ACCOUNTS!
If you close a credit card, it can affect your ratio of debt to available credit, which represents 30% of your score, and also your length of credit history which has a 15% impact on the score. If you really want to close an account, wait and do it after the mortgage is closed.
DON’T MAX OUT YOUR CREDIT CARDS!
Running up your credit cards is the fastest way to bring your score down, and it could drop up to 100 points overnight. Once you are engaged in the loan process, try to keep your credit card balances at or below 30% of the credit limits.
DON’T CONSOLIDATE CREDIT CARDS!
Once again, we don’t want you to change your ratio of debt to available credit. Likewise, you want to keep beneficial credit history on the books.
DON’T RAISE RED FLAGS TO THE UNDERWRITER!
Don’t co‐sign on another person’s loan, or change your name and address. The less activity that occurs while your loan is in process, the better it is for you.