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Qualifying for a Mortgage: Know Your Credit Score

Written By:
May 25, 2011 at 1:29 PM

Your credit score consists of a three-digit rating that demonstrates to potential creditors the odds of you repaying your mortgage or other loan. It not only determines how much a creditor loans you, but what interest rate you pay. Credit bureaus or grantors compute the credit score from data contained in your credit report. Generally, credit reports have the information on payment history, total amount owed, length of credit history, new credit and credit type. Many mortgage applicants do not know their credit scores. All too common, many borrowers receive their score and become disappointed when they fail to qualify for mortgage loans.

If you expect apply for a mortgage soon, find out your score before submitting an application to the lender. This will save you time and a possible emotional letdown. It also allows you to make an inform decision of whether to apply for a loan or wait. In addition, keeps you from lowering your score due to an inquiry from a lending institution.

A credit score of 720 represents the optimal rating. You can potentially save tens of thousands of dollars on your home mortgage. Case in point, with a 30-year fixed mortgage of $150,000, you will pay $190,000 in interest with a 720 credit score. A credit score of 570 will result in mortgage interest payment of $330,000.

Credit Reporting Agencies

Numerous credit-reporting agencies exist, including the following primary players: Equifax, Experian, Trans Union, and Fair Isaac Corp. (FICO.) FICO actually collects your information. The company uses a complex algorithm to determine your credit score. It sells this information to the other companies.

The Fair Credit Reporting Act (FCRA) obligates credit agencies to give you a free credit report each year. Firms charge for receiving your credit score. Start the process by ordering your credit report. Calculate the difference between your rating and a 720 credit score. Follow the steps below if you need to raise your credit score.

Make Payments on Time

Pay all your bills on time with no exceptions. How you pay your bills account for 35% of your credit score. If you have negative information due to late payments in the past, keep in mind creditors give more weight to your recent payment history. Experian states late payments on your credit report show lending institutions that you have a high probability of making late payments in the future. Late payment entries remain on your credit report for seven years.

Correct Mistakes and Inaccurate Information

Often, credit reports contain errors and inaccurate information. When you receive your report, go over the details. Pay particular attention to identify payments incorrectly reported to the credit bureau as “late"-- for both opened and closed accounts. Examine the outstanding balance owed for open accounts to make certain of the proper information. Depute errors with the creditor and the credit bureau.

Alleviate Data on “Undesirable Vendors”

Mortgage lenders typically assign a lower credit score to a mortgage applicant who owes money to a finance company than if the person owed a bank or savings and loan. Lenders perceive finance companies as lending money to "high-risk” consumers. The same rationale applies to borrowers who have department store credit cards; they would normally receive higher scores with bank-issued credit cards.

Reduce the Amount of Debt

Mortgage lenders tend to decline mortgage loan applicants who have a high utilization ratio. They see this as a sign of financial weakness, which could lead to potential problems making timely mortgage payments. Cease using credit cards and began reducing your debt when you expect to apply applying for a mortgage. This logic applies to credit cards as well as home equity line of credit (HELOC).

Avoid “Hard Inquires”

An inquiry refers to a record of someone checking your credit profile and come in two forms - “soft” and “hard.” A hard inquiry occurs when a potential creditor, such as credit card issuer, looks at your credit report after you submit an application for credit. A soft inquiry happens when you or a pre-approved marketer views your credit report. Soft inquires do not affect your credit score.

Sometimes, consumers fill out applications with multiple creditors within a short span in an attempt to obtain the best interest rate. This scenario usually occurs when shopping for an automobile/loan. The vendor may assure you, inquires will count as one, but it depends on the scoring system of the mortgage lender. In this case, provide vendors with your credit score -- upfront -- to negotiate the best price and rate. Select the best offer and allow that vendor to verify your credit score.

Pay Off Collection/Judgment

If you have old collections or judgment on your credit report and you intend to pay off the obligation, keep in mind the “date last active” may change. The new” last active date” will have more of an affect on your credit score and actually reduce your rating. Nonetheless, you will have to pay off the debt to qualify for a mortgage.





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