A Key Element in your Mortgage Application Process
When you apply for a mortgage, lenders will review your credit history. What impact does your credit history and score have on getting a mortgage? How will it affect the rate you qualify for?
In order to get a mortgage, especially one with a low interest rate, you usually need to have good credit. Lenders prefer to lend to those who can most easily pay back the debt, and your credit history and score are an indication of your past habits.
Your credit history is record of your debt history, including all open and fully repaid debt obligations. A credit history helps a lender to determine whether a potential borrower has satisfactory history of repaying debts responsibly, which would determine the borrower’s credit worthiness.
Your credit report is a record of your credit history. This record helps lenders determine whether a borrower has a history of repaying debts in a timely manner.
A credit score is a numerical representation of your credit worthiness. Borrowers with a low credit score represent a higher risk and, therefore, lenders charge higher interest rates to help protect themselves from loss.
The most common credit scoring model is the FICO® score, issued by Fair Isaac Corporation. Scores range from 300-850, and the higher your score, the better. Your score is calculated using data from your credit report, which is compiled by three credit bureaus: Equifax, Experian and TransUnion. A lender may check your score from all three bureaus or only one.
How your Credit Score is Calculated
The following are the factors used to calculate your credit score:
Payment History (35%): This category considers your bill paying habits for all credit accounts you may hold. If you make a late payment, your score will take a hit, and the more recent, frequent, and severe the lateness, the lower your score will go. Bankruptcies, judgments and collection accounts will also have a serious negative impact.
Amounts Owed (30%): This category takes into account how much you owe compared to the credit available to you. The closer your balances are to your credit limits, the greater the negative impact is on your score.
Length of Credit History (15%): This category takes into account the length of time that you’ve responsibly maintained credit accounts. Lenders tend to prefer borrowers with longer credit histories.
New Credit (10%): Having recent inquiries and opening a lot of new accounts can lower your score. However, all mortgage or loan inquiries that occur within a short period of time are considered just one inquiry for scoring purposes. Accessing your own report through the credit bureaus will not affect your score.
Types of Credit Used (10%): Having a variety of accounts, such as credit cards, retail accounts and loans can boost your score.
If your score is lower than you need to get a mortgage, there are many things you can do to boost it from this point forward:
- Always make your payments on time, even if they payments are the minimum payments.
- Repay collection accounts.
- Pay down your debt. Keep balances under 40% of the credit limit.
- If you already have 2-4 accounts open, avoid opening further accounts.
- Keep older accounts active.
- Avoid excessive credit applications.
Review your Credit Report Regularly
Reviewing your credit report regularly is a good idea, but it is particularly important to do so before seeking a mortgage. Even if you always make your payments on time and have a low level of debt, your credit report could contain score-lowering errors. Check your report at least 60 days before you plan to apply for financing, as it can take some time to resolve issues.
You can obtain your one credit report from each credit bureau (Experian, Equifax and TransUnion) for free every year by visiting annualcreditreport.com. Scores can be purchased for a fee. If you see any errors on your report, send a dispute letter to the relevant credit bureau(s) indicating which information is incorrect. They must investigate your claim and remove unverifiable information.
Source: BALANCE, balancepro.net
About UW Credit Union
This information is provided to you courtesy of UW Credit Union, based in Madison, WI. UW Credit Union is a leading provider of home loans in Dane County and throughout Wisconsin.
For more information about the home loan process, please contact a UW Credit Union Home Loan Specialist at 800.533.6773, ext. 2810, or vist UWCU.org.