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Helpful Mortgage Credit Information
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What is a Credit Score?
When you apply for a mortgage, you expect your lender to pull a credit report and look at whether you've made your payments on time. What you may not expect is that they seem to be more interested in your "credit score”. "What is a credit score?" This is a common reaction.
A Brief Explanation of Your Credit Score
Each time your credit report is pulled, it is run through a computer program with a built-in scorecard. Points are awarded or deducted based on certain items such as how long you have had credit cards, whether you make your payments on time, if your credit balances are near maximum, and assorted other variables. When the credit report prints in your lender's office, the total score is displayed. Your score can be anywhere between the high 300's and the low 800's.
Lenders wanted to determine if there was any relationship between these credits scores and whether borrowers made their payments on time, so they did a study. The study showed that borrowers with scores above 680 almost always made their payments on time. Borrowers with scores below 600 seemed fairly certain to develop problems.
As a result, credit scoring has become a more important factor in approving mortgage loans. Credit scores also made it easier to develop artificial intelligence computer programs that could make a "yes" decision for loans that should obviously be approved. Today, a computer and not a person may have actually approved your mortgage.
In short, lower credit scores require a more thorough review than higher scores. Often, mortgage lenders will not even consider a score below 600. Some of the things that affect your credit score are:
- Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgages, etc.)
- Presence of adverse public records (bankruptcy, judgments, suits, liens, wage attachments, etc.)
- Severity of delinquency (how long past due are the accounts)
- Amount past due on delinquent accounts or collection items
- Time since the past due items, adverse public records or collections items have been added to the file
- Number of past due items on file
- Number of accounts paid as agreed
- Time since accounts were opened
- Time since accounts were opened, by specific type of account
- Time since account became active
- Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account
- Number of recent credit inquiries
- Time since recent account opening(s), by type of account
- Time since credit inquiry(s)
- Re-establishment of positive credit history following past payment problem
- Number of (presence, prevalence, and recent informationon) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.)
- Amount owing on accounts
- Amount owing on specific types of accounts
- Lack of a specific type of balance, in some cases
- Number of accounts with balances
- Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts
- Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans)
Please Note that:
- A credit score takes into consideration all these categories of information, not just one or two. No one piece of information or factor alone will determine your score.
- The importance of any factor depends on the overall information in your credit report. For some people, a given factor may be more important than for someone else with a different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your score. Thus, it’s impossible to say exactly how important any single factor is in determining your score – even the levels of importance shown here are for the general population, and will be different for different credit profiles. What’s important is the mix of information, which varies from person to person, and for any one person over time.
- Your Credit Score only looks at information in your credit report. However, lenders look at many things when making a credit decision including your income, how long you have been working at your present employer, and the kind of credit you are requesting.
- Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or re-establishing a good history of making payments on time will raise your score.
bob.bradshaw@lakewoodhome.net
Toll Free 1-800-276-8119 ext. 106
Fax 1-616-301-1445
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