Your Credit Score and Mortgage Qualifying

Your Credit Score and Mortgage Qualifying

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This is one in a series of articles related to the sub-prime mortgage mess that dominated the news in 2007 and will likely continue to be big news throughout 2008.

Your credit score is one of the most important numbers you need to know, perhaps having more influence over you than even your social security number does. Your credit score determines if you qualify for lending (including a home loan) and what your interest rate will be for your loans. Unlike your stable social security number, your credit score can fluctuate, depending on what you do as a consumer.

Your Score and Who Has It

Three major credit reporting bureaus track your credit history and assign a score based on what they know about you. Experian, TransUnion and Equifax are private companies, but are widely regarded as authorities in consumer credit.

The information they have about you in your personal report isn’t always accurate which can impact your score. Therefore, Congress has stipulated that every U.S. consumer is entitled to one free copy of his credit report from each company annually. This move allows you to obtain your credit report and make the necessary corrections, if needed. You’ll still have to pay a few dollars to get your score, but you need to have it.

3 Credit Reporting Companies, 3 Scores

Your scores won’t be the same with each credit reporting company and you won’t necessarily know which company’s score was used to qualify you unless you ask. Some states requires full disclosure of this information to you, so ask.

Your scores are calculated similarly by all three companies with the higher scores resulting in easier loan approval and lower interest rates.

5 Parts, 1 Score

Each credit reporting company calculates your credit score (a/k/a FICO score) to include five areas with added weight given to certain criteria over others:

  1. Payment History — 35%
  2. Amount Owed — 30%
  3. Length of Credit History — 15%
  4. New Credit — 10%
  5. Types of Credit Used — 10%

If you have paid your bills on time and your outstanding balances are reasonable for your income level, then 65% of the score is weighted to these two criteria. Less weight, 35%, is given to the remaining three criteria, but they are still important considerations and can move you up or down a notch spelling the difference between approval and rejection as well as monthly payment amounts.

The Difference Between Good and Bad Credit

Ultimately, the difference between a consumer with good credit and the one with bad credit can be seen in two areas:

  1. The interest rate you will be charged for loans, and
  2. whether you will be lent money in the first place.

Not sure if you will qualify for that mortgage when you do your home shopping this spring? Then, go ahead and order your credit reports right now, obtain your credit scores, work on fixing credit report mistakes, and taking the steps necessary to get your credit house in order.

The pay off for you could be a new home with a competitive mortgage interest rate, something many consumers will miss if they aren’t on top of their credit.

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