A Quick Guide to Understanding Your Credit Score for Mortgage Lending
Are you planning to apply for a mortgage in the future? If so, are you concerned about how your credit score will affect your interest rate, your monthly payment, or for that matter, your ability to get a mortgage at all? It’s important to understand what a credit score is, its impact on your mortgage terms and what you can do to make it better.
How can I find my credit score and how does it affect my mortgage?
Annual credit report is the online source for an accurate FICO number. A score over 800 is excellent and one from 700-800 is very good. These scores will generally get the best mortgage rates.
While good (680-699), fair (620-679) and poor (580-619) scores may also qualify, the interest rate and monthly payment is likely to be higher. Bad (500-579) and very bad (under 500) ratings can make mortgage approval unlikely.
What is FICO and how do they determine this number?
Fair Issacs Corporation (FICO) makes an analysis of your credit history and derives the number.
Payment history – whether you have consistently paid bills on time – is 35 percent of the score.
Utilization rate – how much you owe compared to your limits – makes up 30 percent.
Length of credit history –how long your accounts have been open and how long you’ve used them – is 15 percent.
Type of credit, such as revolving charge and installment loans – makes up 10 percent.
Inquiries – applying for and opening new credit accounts – is also 10 percent.
Is there something I can do to improve my score?
Absolutely! If you think you might have to settle for a bad credit mortgage, there are steps you can take to improve your situation. Look at the factors that determine your score and address them. Since timely payment makes up over a third of the score, make this a priority.
Paying bills consistently and on time in the most important single thing you can do. If you are having trouble meeting all your bills, talk to your creditors or to a credit counselor. While this won’t improve your score immediately, it won’t hurt it, and the advice you receive may help you over time.
Second, note that utilization rate is almost as important. Paying your credit cards down to under 30 percent of their limit will improve your score in this arena. Also, you can’t get a better score by paying one card balance with another and moving debt around.
To improve your score on length of credit history, leave old accounts open even after you’ve paid them off. Finally, be cautious when applying for new cards. Don’t apply for a lot of new loans at the same time.
Also, if you find there are any inaccuracies in your credit report, immediately report it to the credit reporting agency (Equifax, Experian, or TransUnion) and to the bank, lender or credit card company that provided the misinformation. Few things are more important to your financial well-being than your FICO score. Make sure it’s been determined fairly!