The term “credit report” or “credit score” often goes hand in hand when you enter the world of mortgage lending. While many borrowers have an idea of what is involved in credit reporting and scoring, they may not understand how taking corrective action can positively impact their score.
What is a credit score and how does it influence mortgage loans?
Your credit score has never been more important to obtaining a mortgage loan today than ever. In basic terms your credit report is a financial snapshot of your asset and debt behavior spanning several years. Items such as a loan pay off, missed mortgage payments, bankruptcies, foreclosure, credit card payments or income increases are reported to the national and local credit bureau agencies.
You are assigned a credit rating based on the financial asset and debt behavior on your report. This rating can range from zero to 850. The higher the score the better the mortgage loan candidate you are considered to be by mortgage brokers. Having a score of 850 is not necessary to obtain the best loan rate, however anything above 700 is considered to be considered a strong mortgage loan candidate.
According to Maxine Sweet, Experian VP/Public Education, “Its’ very rare to be there (850 credit score). I’ve never seen it.” She adds that although you can have a perfect 850, the majority of scores she has seen top off at 825, which is pretty close to ideal.
After the mortgage meltdown three years ago, lenders began looking even closer at credit scores to ensure protection against mortgage loan default. In the past a credit score of 550 (or even lower for some lenders) might be sufficient to obtain a loan at a decent rate, however with tight lending standards and the overall skittish nature in the business, many mortgage brokers won’t even entertain the notion of granting any mortgage loan to someone who has a credit score below the 650 range.
Your credit score not only impacts whether you are granted a mortgage loan, but also the quality of the rate. In basic terms, those with higher scores received the lower rate. Borrowers with higher scores are also considered to be more attractive mortgage loan candidates to a variety of borrowers, which allows the borrower to be more discerning about which mortgage broker he or she selects.
What can you do about your credit score?
At this point, you may think that, “my credit score is only 620 so there is no way I will be approved for a mortgage loan.” Not so fast. Although your credit report may contain information about your financial behavior, it isn’t always accurate. Often, borrowers will find errors throughout their report, and when corrected the score often increases.
The first step to ensuring your credit report is accurate is to review it line item by line item. You can obtain a free yearly copy through companies such as Equifax, Experian or Trans Union.
If you find any inaccuracies in your name, address or financial information, contact the consumer credit reporting agency immediately.
Making contact in writing is typically the best way to ensure that you have proof that you contacted the agency. Once you’ve made contact, it is up to the agency to research and remove the flawed information. Because the process can take up to 45 days, it is important that you conduct a credit report check long before you submit applications for mortgage loan pre-approval.
What changes can help you get a mortgage?
All revisions on your credit report are not created equal. While it is important to ensure that all information is completely accurate on your report, some revisions will hold more weight on raising your credit score than others.
Correcting areas in five specific areas may have a direct impact on your score:
- Payment history determines approximately 35% of your score so review payment dates and reports of late payments for credit cards, installment loans, mortgage loans or finance company accounts. If the report reflects incorrect late payments or if you’ve paid off an account and it reports that you are delinquent, it is vital you correct the error.
- Outstanding debt impacts 30% of your score, which means large credit card balances have a negative impact. One way to remedy this issue is to pay down your balance before talking to a mortgage broker. However, credit card companies can make mistakes so compare the balance reflected on the report with your statements to ensure they match.
- Credit history demonstrates your longevity as a borrower. This accounts for 15% of your score and gives your mortgage broker insight into your borrowing staying power. Longer, consistent borrowers are looked upon favorably so check your dates with creditors to ensure they are correct.
- New credit accounts weigh in at 10% of your score. Opening too many new accounts can negatively impact your score. However, if you discover that new accounts were being opened in your name, but you did not open them, contact the credit bureau and the creditors immediately to prevent further damage. This type of activity signals identity theft, which will have serious consequences on your credit.
- Active credit use influences 10% of your score. When the department store clerk offers you a small discount for opening their credit card, consider whether you plan to actually use the card or only want to open the account for the discount. The more dormant credit lines to your name, the lower your score. Close accounts that are not actively in use.
What won’t impact your score, but you should still change
Certain inaccuracies on your report may not influence your credit score but are still important to revise. For example, an incorrect address should be corrected but will not influence your score. TransUnion’s Cliff O’Neal says, “This type of information would not impact one’s credit score. A lender, however, might use other services, e.g. a fraud detection application, in which multiple addresses might trigger the lender to investigate this issue further.”
Of course an unrecognizable address should definitely be a red flag, alerting you to the possibility of fraud. Additionally, others may share your name so if you find multiple errors in your report, contact the reporting bureau to determine if another person’s credit history has been transposed onto yours.
Other small areas that you should change, but won’t have a huge impact on your score, are your age and the spelling of your name.
Another area that will not influence your score is making a credit report inquiry. According to Experian, personal credit report inquiries or when an employer checks your credit do not affect your credit score and do not appear to creditors.
To check you credit report for free visit a government website AnnualCreditReport.com