Sunday, November 8, 2009
Application Denied! That’s the last word you want to hear when applying for a mortgage! Credit scores play a vital role in the mortgage application process. It’s to your benefit to keep your credit score as high as possible. The way you’ve handled your finances in the past will predict how you handle your finances in the future. Generally speaking, the higher your credit scores, the lower your interest rate.
Birth of a Credit Score
A person’s credit score is a computer generated summary calculated at the time of request. It is based on information compiled by the three major credit reporting agencies consisting of your credit history and payment patterns. Credit scores are used to assist lenders in determining whether you will be able to obtain a mortgage loan, and what interest rate they will be able to offer you. Your credit score changes, depending on how you conduct your personal finances. There are many other factors that go into a credit score. Each reporting agency has their own criteria in determining the credit score they report.
The most commonly used credit score is provide by Fair Isaac Corporation AKA FICO® score. Scores can range from 300 (very low) to 850 (very high). Most mortgage lenders consider a credit score above 700 very good. Lenders have loan programs available for borrowers with credit scores as low as 620. A few lenders loan programs accept scores even lower.
Play the Percentages
Different factors play into determine your credit score. The key factors are:
Payment History – 35% - Timely payments on all credit accounts will push your scores up. Late payments or spending past the credit limit will plummet them. Bankruptcies and liens are other major factors that will lower your score.
Total Amount Owed – 30% - What’s owed vs. your available credit. Maxing out credit lines will lower your score. Keeping at least 50% of your available credit open will push your credit score up.
Length of Credit History – 15% - Shows how long you have been using credit and how you’ve managed your finances in the past. The longer the credit account is open and paid as agreed, the higher your credit score will go.
New Credit Accounts -10% - Accounts recently opened and recent credit inquiries. Applying for a lot of credit can lower your score.
Type of Credit Being Used – 10% - Credit accounts such as credit cards, installment loans, mortgages, and other types of credit extended to you. If you have a lot of credit cards, your credit score may go lower.
The best way to go to keep your credit score up is to pay your bills on time, and limit the amount of debt you take on. Your credit report and your credit score communicate how you manage money. With good financial management, you’ll secure a good credit score and smooth sailing when it’s time to acquire a mortgage.
The Top 3 Credit Bureaus
Below are the three major credit reporting agencies and their contact information:
P.O. Box 740241
Atlanta, GA 30374
P.O. Box 9701
Allen, TX 75013
P.O. Box 2000
Chester, PA 19022
Saturday, November 7, 2009
When you’re preparing to purchase a home, the best way to approach the process is to get your mortgage approval settled before you begin your search. By doing this you’ll be able to know what your price range is, and be ready to quickly make on offer on your dream house when you find it.
There are some differences between a pre-qualification vs. pre-approval. Pre-qualifying is an estimate of what you might be able to borrower. A pre-approval is a loan approval that carries with it certain conditions.
1. Provides an estimate of your borrowing ability
2. Based on a summary of information that you provide about your income and assets
3. Usually involve a credit check
4. Completed in a just a few minutes with a qualified mortgage loan officer
5. Most lenders do this free of charge
1. Provides proof to real estate professionals and home sellers that you are conditionally approved for a specific loan amount
2. Based upon completion of a loan application and an underwriter’s verification of your income and assets
3. Includes a credit check
Will take more time than a pre-qualification as it is a much more in depth process
4. You’ll need to provide payroll receipts, bank checking/savings statements, other asset statements (such as IRA, 401(k), brokerage) W-2’s for the two previous years, and tax returns for the two previous years
5. It is conditional and is based on a number of factors such as:
- The home you’re considering to purchase or refinance will need to appraise at the value you estimate it
- Satisfactory title review
- Meeting all the loan program guidelines for the type of loan you want
- You must ensure that no material changes occur in your personal finances like, a decrease in family income, taking on additional debt, lowering of bank checking/savings balances
6. Most lenders will do free of charge
Remember, a pre-qualification is not a comprehensive evaluation therefore it is not guaranteed so it carries far less weight with a real estate professional than a pre-approval.