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Credit Score 101

First of all, lenders want to make mortgages, but they also are required to minimize their own risk. This is typically done by using credit scores as a measure.

Credit scores are compiled separately by three consumer reporting agencies — EquifaxExperian, and Trans Union. These credit reporting bureaus calculate scores differently, and base their scores on information that may differ from other bureaus.

Equifax Beacon 5.0 Facta: scores range from 334 to 818.

Experian Fair Isaac V2: scores range from 320 to 844.

Trans Union FICO Risk score Classic 04: scores range from 309 to 839.

A credit score is a unit of measure in the form of a number that reflects the information in the credit report, timely payment of bills, how much is owed, payoffs, and derogatory information such as liens. It also includes inquiries into accounts from lenders, landlords, and employers.

So, when you apply for a home loan, your application includes giving your lender permission to “pull your credit” and base the decision to lend to you and the rate of interest on the information contained in your credit scores. The higher the score, typically the better terms you’ll receive from the lender.

Once credit scores are reviewed by the mortgage lender, a computer-generated report of the findings is mailed, but it most likely will not include a copy of the ntire credit report. It should include key factors that adversely affected scores. Some examples might include:

  • Too many inquiries in the last 12 months
  • Time since most recent account opening is too short
  • Proportion of loan balances to loan amounts is too high
  • Too many accounts with balances
  • Amount owed on revolving accounts is too high

What can you do if you’re declined for the loan, or your lender wants to charge higher interest than you were expecting? Talk to your lender and ask for help repairing or correcting your scores. For example, you may have innocently done something that resulted in a negative score, such as closing a line of credit. Or, you may not have realized that a late payment would bring your score down as much as it has. The lender should tell you what you need to do.

Under federal law, individuals have the right to obtain a free credit report from each of the national consumer credit reporting agencies once a year. There are several sites to facility this including AnnualCreditReport.com or FreeCreditReport.com.

If there is a discrepancy or an account that shows the wrong balance, simply show work through the lender and produce things like a canceled check, release of lien or other proof that the credit report is wrong. This will need to occur with each of the three main reporting agencies.

While there is no real hard rule on exactly what scores will be approved, there are some formulas and algorithms that are industry standard. Typically speaking, 680 and above are best credit scores to work with. If you are willing to do the work and pay a little extra, you can probably get through on a 580, but that is not set in stone.  FHA approval starts at about  600, depending on the program, some say 580, but to be a sure bet on getting approved at a desirable rate, you will need a 620 or higher typically speaking.  Again, talk to your lender as these are just benchmarks and no guarantees as I am NOT a lender but a licensed Realtor.

Call me for a referral if you need a good mortgage lender, and do what he/she tells you to do to get the best rate, including paying more than the minimums, paying on time, and making sure that your debt to income is well within your ability to repay all your loans. Getting prequalified is the first step in this crazy and competitive market! This is a first step even if you need to sell a home then buy another one. It is imperative to have your ducks in a row when making an offer. I am very creative in this seller’s market both in helping buyers with solutions outside of the box as well as strategic planning and marketing for both buyers and sellers. I hope to hear from you! 512-507-1498…