The Impact of your Credit
Everyone talks about getting a favorable rate on their mortgage; and one of the most important factors in getting that favorable rate is your credit score. In this section, you will learn what it means, how it is determined and how to improve it. Plan ahead, it can take several months to successfully correct and improve your credit score; and this should be completed before you apply for your mortgage.
What Your Credit Score Means
Your credit score is essentially a standardized way for lenders to determine how risky it is to lend you money. The better the score, the lower the risk. The lower the risk, the lower your interest rate. In order to get the most favorable rate on your mortgage, you will want to have the best credit score possible.
Most lenders use a standard “grading” system to categorize credit scores. While some lenders develop their own systems for classification of scores, below is a general guide to score categorization:
|800 – 850||A+|
|750 – 799||A-|
|700 – 749||B+|
|650 – 699||B|
|600 – 649||C|
|550 – 599||D|
|500 – 549||D-|
|300 – 499||F|
How Your Credit Score Is Determined
Your credit score is formally known as a Fair Isaac Corporation Score (commonly called the FICO® score). It ranges from 300 to 850 and is calculated according to the following risk factors:
- Payment History (35% of score)
- Payment information on several types of accounts
- Public record and collection items
- Details on late or missed payments – specifically:
- How late they were
- How much was owed
- How recently they occurred
- How many there are
- Amounts Owed (30% of score)
- Amount owed on all accounts
- Amount owed on different types of accounts
- Whether you are showing a balance on certain types of accounts
- How much of the total credit line is being used
- How much of installment loan accounts is still owed
- Length of Credit History (15% of score)
- How long your credit accounts have been established, in general
- How long specific credit accounts have been established
- How long it has been since you used certain accounts
- New Credit & Inquiries (10% of score)
- How many new accounts you have
- How long it has been since you opened a new account
- How many recent requests for credit you have
- Types of Credit (10% of score)
- What kinds of credit accounts you have and how many of each
- Total number of accounts you have
How You Can Improve Your Credit Score
If your credit score is keeping you from getting a better mortgage rate, here are a few things you can do to clean up your credit history.
Obtain a complete copy of your credit report from the three leading reporting agencies:
Review your credit report line-by-line, specifically searching for errors, omissions, duplications and “common name” errors. If you encounter errors, you should write out exactly what should be corrected and why. You are able to add 100 words or less to reports on questioned items. You can also find assistance through credit counselors, who are available through the various credit bureaus.
Federal law requires credit bureaus to contact all creditors on items where mistakes were made. According to the Fair Credit Reporting Act of 1971, if these firms fail to respond to you in writing within 30 days, they are obligated to remove the disputed items from your records. The Fair Isaac Resolution Resources Helpline is 1-800-777-2066.
Most merchants are willing to negotiate customized repayment plans for those that find themselves with considerable debt.
Chapter 13 bankruptcies stay on an individual’s record for 7 years.
Chapter 7 bankruptcies stay on an individual’s record for 10 years.
Judgments, Garnishments or Liens
Liens, garnishments and judgments are typically indicators of an unstable borrower. Any judgments, garnishments or liens must be paid in full. Prior to closing, proof that the judgment, garnishment or lien has been cleared must be obtained; this can be reflected through a clear credit report supplement or a paid receipt form from the creditor. IRS tax liens also must be paid in full. Standard property tax liens do not have to be recorded as paid in full since they are not yet due or payable. Also, the borrower is obligated to provide a satisfactory letter of explanation.
Delinquent Child Support
Any outstanding child support payments must be brought current, and specific documentation from the credit-reporting agency stating this fact must be in the file, with no exceptions. Because of the seriousness of the delinquency/default, which in many states can cause incarceration, a letter from the court or the legal authority responsible for collection in the city/state (e.g. district attorney, sheriff, etc.) is acceptable. A letter from an ex-spouse and copies of personal checks are not acceptable, nor is an agreed-upon, but not yet completed, payment plan.
Of Note: The information contained here has been prepared by an independent third party and has been distributed to consumers for educational purposes only. The information is not guaranteed to be accurate and does not represent the opinions of OGI Mortgage Bankers.