Owning a home is the American dream, but many first-time homebuyers don’t realize how important their credit report and score are to the lender evaluating their mortgage loan application. Like it or not, your three-digit credit score is your financial “report card” and it shows lenders just how trustworthy you are when it comes to managing your finances. That one number can either save or cost you thousands of dollars throughout your life.
Here’s what you need to know before hitting the mortgage application process.
According to the Fair, Isaac Corp, your score is made up of five categories of information:
- Payment history (35%) – Points are added for paying on time and deducted for late or missing payments. It’s the biggest part of your score so make sure you are paying on time.
- Amounts owed (30%) – Otherwise known as your credit utilization ratio. How much money do you owe as a portion of the amount of credit available to you? The lower this ratio, the better.
- Length of credit history (15%) – When did you open your first account and is it still open?
- New credit (10%) – opening several credit accounts in a short amount of time represents a greater risk—especially when applying for a mortgage.
- Credit mix (10%) – This is your revolving credit (such as credit cards) versus your installment credit (such as car loans and mortgages).
Your FICO® score is unique, so for some people, the importance of these categories can be different. For example, scores for people who have not been using credit for long will be calculated differently than those with a longer credit history. And, as the information in your credit report changes, so does the evaluation of these factors in determining your FICO Scores.
You can go directly to each of the credit bureaus to sign up for their credit monitoring (for a fee) to get your credit score. All the terms are different so pick the one that works best for you.
Your Credit Report
Your credit report and your credit score are not the same thing. Your credit report contains information that a credit reporting company has received about you. Your credit score is calculated by the complex formula mentioned above.
The information in your credit report may affect your mortgage rates, credit card approvals, apartment requests, or even your job application. Reviewing your credit report helps you catch errors and signs of identity theft early.
Federal law allows you to get a free copy of your credit report every 12 months from each nationwide credit reporting company. However, the law does not require credit reporting companies to provide a free credit score.
Request your free credit reports at www.AnnualCreditReport.com
Once you have copies of your reports, immediately look for fraudulent or erroneous information. If you find any errors or fraud, immediately contact both the credit reporting agency and the company that is reporting inaccurate information to dispute the information.
Credit Scores for Mortgages
Your score can range from about 300 to 850. Everyone has a different definition of a “good” score compared to “excellent” versus “poor.” Your goal should be to shoot for a score of 740 or higher, to get the best deal on a mortgage.
The higher your credit score, the more creditworthy you appear to lenders (meaning they can count on you to pay your debts on time), which translates into lower interest rates and more money saved when you get a loan.
If your credit score is below 650, you should start taking steps to improve your score by reducing your debt, paying your bills on time, and making sure that your credit report information is accurate. It can take some time to raise your score, but it is important to show lenders that you are responsible and creditworthy.
If you need help to budget and work your way out of debt, talk to us today. We can point you in the right direction so you’re ready to submit your mortgage application and get the best deal possible.