Your Credit Score: The Good, The Bad, The Ugly
We’ve all been judged by numbers before; your age, your grades in school, even your zip code. It should come as no surprise then that you can be summed up to a single number when determining if you can buy a home. Enter, the credit score. Whether we like it or not, the credit score is a huge factor when determining if someone is eligible to get a home loan. Before handing you $150,000, mortgage lenders need to know if you have the ability to pay back the loan and if you are willing to pay back the loan.
To determine your ability to pay back the loan, a lender will look at your debt-to-income ratio and make sure you have enough income to pay your monthly mortgage payment. But in order to determine your willingness to pay back the loan, lenders will look at your credit score.
The FICO Score
The most commonly used credit score is the FICO score, which was developed by Fair Isaac & Company, Inc., hence the name. This score is between 300 and 850, with the higher score deeming a person low risk, or more willing to pay off debt. The FICO score only considers information contained in your credit profile, and not your income, savings, down payment, or any demographic information. Excluding demographic information is important as it makes the credit score based purely on your credit history and not age, gender, race, nationality, or marital status.
Late payments, current loan amounts, length of your credit history, and number of times your credit has been pulled are all considered in credit scores. Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or reestablishing a good track record of making payments on time will raise your score. Each behavior is weighted within the FICO score (as shown below).
Know Your Score & History
It is important to know what your credit score is so you won’t be surprised in the home loan process and you can ensure the information included in your report is accurate and up to date. Fair Isaac has created a website (www.myFICO.com) where for a reasonable fee, you can quickly get your FICO score from all three reporting agencies, along with your credit report. There is also helpful information and tools that help you analyze what actions might have the greatest impact on your FICO score. Each of the credit reporting agencies offer similar services on their website: www.equifax.com, www.experian.com, and www.transunion.com.
Note: Theoretically, if a series of credit reports is requested on your behalf during a limited amount of time, your score goes down until time passes without any inquiries. However, changes in the law have made "consumer-originating" credit report requests not count as much. A series of requests in relation to getting a mortgage or car loan is not treated the same as a number of credit card requests in a limited time. This is because the credit bureaus, and lenders, realize that people request their own credit reports to keep up with what's on them, and smart consumers shop around for the best mortgage and car loans.
Have questions about your credit score and how it’ll affect your home loan? Schedule a free consultation with one of our home loan experts and they’ll give you a clearer picture of the home loan process and what goes into getting a mortgage. They can give you a call, shoot you an email, or set up a meeting and there are absolutely no commitments or obligations.
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Lincoln Savings Bank, Member FDIC, Equal Housing Lender
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