When it comes to qualifying for a low-interest home loan, your credit score is vitally important. Potential lenders use the score and your credit history to determine the type of mortgage and interest rate they are willing to offer.
To obtain the best financing options, you must understand what goes into your credit score, how to keep it in good shape and how to repair it when something goes wrong.
Your credit reports are compiled by three major credit bureaus: Experian, Trans Union Corp. and Equifax. The reports contain a great deal of information that includes:
Identifying data such as your name, address, Social Security Number, date of birth and employer;
Balances and limits on your credit cards and loans;
Your payment history and
Any overdue debts, bankruptcies, foreclosures, suits, wage attachments, liens and judgments.
This information is used to determine your FICO™ score, which is a statistical calculation that represents your creditworthiness1. That is what lenders rely on most to assess the risk of providing you with a mortgage and to determine the interest rate they will charge. Some lenders will offer loans or low rates only to individuals with credit scores that fall within a certain range.
Unfortunately, credit reports often contain outdated information and mistakes, so it’s a good idea to review yours at least once a year and certainly before you apply for a home loan. Under federal law you are entitled to a free annual credit report from each of the three credit bureaus every 12 months. If you find errors or inaccuracies, act quickly; it can take as long as 30 days for corrected information to appear on your reports.
Another factor used to determine your creditworthiness is your credit utilization ratio. This is the difference between your available credit and the amount you are using. Thirty percent of your FICO score is based on this ratio. Typically, the lower your credit utilization ratio, the higher your credit score. Lenders ideally like to see a ratio of 35 percent or less.
Here’s how the ratio works: If you have three credit cards with a combined limit of $10,000 and you have $7,000 in outstanding balances, your utilization ratio is 70 percent. You simply divide your balances by your limits and multiply by 100. Rule of thumb: It’s better to have several cards with low balances than a few cards with high balances.
If for some reason your credit score isn’t up to par, it doesn’t have to haunt you forever. Because the score keeps changing to reflect your evolving credit history, you can repair it over time, and then maintain it, by following these six steps:
1. Pay all bills on time. Timely payments account for 35 percent of your FICO score.
2. Pay more than the minimum amount. Typically you will see your credit score rise when you bring down your balances with higher payments.
3. Maintain low balances relative to your available credit so you can keep that low utilization ratio.
4. Keep your oldest credit card open to lengthen your credit history and avoid new credit cards you don’t need. The length of your credit history accounts for ten percent of your FICO score. New debt accounts for another ten percent.
5. Maintain unused credit cards. Closing them can make your utilization ratio appear higher.
6. Avoid paying off all your accounts or moving balances to other cards. The better you handle your balances the more you show potential lenders you know how to manage debt.
Following these guidelines can help you qualify for low-interest home loans and other credit. Speak with your professional advisor for additional guidance.
1FICO is an acronym for Fair Isaac Corp., the company that developed the software used to calculate the score
Now: Need A Home to Purchase With That Good Credit? Just call Earl: 770-377-5793 or email: EARL@EARLPARK.NET