We hear plenty about credit scores online and in commercials. But what exactly does it all mean in terms of getting a mortgage? When speaking about a credit score in relation to a mortgage, the correct term is in fact someone’s FICO score. FICO scores range from 300 to 850—the higher the score, the better. The score is calculated from five basic categories: payment history, accounts owned, length of credit history, new credit, and types of credits used. For the general population, the two categories that considerably impact FICO scores are payment history and amounts owed. The chart below, courtesy of myFico, shows the relative importance of each category in calculating the FICO score for the general population.
How do I know what my score is?
FICO scores are not the same as a free credit report; however, everyone is entitled to receive a free copy of his/her credit report once a year. A report can be ordered from www.annualcreditreport.com. The credit report will detail current and past credit accounts listing the type of account, the date it was opened, the credit limit or loan amount, and the payment patterns during the last two years.
To purchase the report closest to what mortgage bankers use, go to www.myfico.com .
What does my score mean?
High FICO scores, 760-850, result in lenders offering consumers lower interest rates and more loan choices. Borrowers with scores of 620 or lower may not receive the same number of loans compared to their top tier counterparts. Additionally, lower scores can mean higher interest rates. Why? Lenders use FICO scores as a guideline to help them gauge the likelihood the borrower will pay back their loan with timely payments. Click here to view the myFico Loan Savings Calculator to see how scores impact mortgage interest rates.
Many traditional lenders require a minimum score of 640 or higher, with a few exceptions. Borrowers can obtain a conventional mortgage loan with a score of at least 620 and a minimum of 20% down. For more information on FICO scores and lending programs, contact us to be put in touch with a professional mortgage lender.
What happens if I have a low score?
Don’t despair; it will take some time but scores can be improved. The first step to improving a score is to take control. Plan a monthly budget to be able to pay bills on time and reduce owed debt. Compare the amount you earn to monthly living expenses (ie. rent, groceries, gas, etc). There are plenty of free budget calculators online. Here’s one from CNN Money.
Pay bills on time
Delinquent payments can have a significant negative impact on FICO scores. Missed payments, or collections, remain on the report for 7 years while bankruptcies will show up for 10 years. Find a system that works best for your lifestyle and set up payment reminders. The longer you pay your bills on time after being late, the more your FICO score should increase.
- Some banks offer e-mail and text reminders—contact your bank to find out more.
- Do you have a smart phone? Schedule a reoccurring event in the calendar a few days before the bill is due.
- Consider enrolling in automatic payments debited right from a checking account. Be careful with this option: ensure there is an adequate amount of funds in the account to avoid overdraft fees.
Reduce owed debt
The best way to get out of debt is to avoid incurring additional debt. Easier said than done right? Getting out of debt is easier if you spend smarter.
- Pay in cash. A person is less likely to overspend if he or she uses available funds, money already earned, versus money you anticipate earning next month.
- Pay off your credit cards. Use your credit report to find out how much you owe in each account. Balances over 7% of the limit decrease scores. Next, go online or check recent statements to determine the interest rate for each account. Come up with a payment plan for your cards allotting the most money to the one with the highest interest rate while maintaining minimum payments on the rest. Once you pay off one readjust your system to do the same with the next highest. Closing and opening credit cards can also drop scores so work on paying off the cards and then consult a mortgage professional for more advice.
- Stop shopping online. Online shopping makes everything more convenient right? Yes, it makes spending money VERY convenient. Remove your credit card information from the payment options, or go even farther and close the account entirely. The next time you need to purchase something go to the store. If that’s too much of a hassle then do you really need it?
- Use credit cards for emergencies only. No, buying an Xbox or new handbag does not constitute an emergency.
- Redirect your funds. The next time you want to purchase something on Amazon (if you haven’t closed your account) or at the mall, take the amount you would spend and instead put it in a jar—assuming you have the cash and weren’t going you use that credit card. Anytime you avoid buying something you don’t need, put that amount in the jar. Then use those funds towards next month’s bills.
These are all great ways to begin repairing a credit score, but the best advice is to contact a trusted mortgage lender and speak to a professional. Nothnagle REALTORS® partners with two local mortgage companies to provide you with the most information and to get you the best rates.
Find out more by contacting either Nothnagle Home Securities Corporation or Premium Mortgage Corporation.
Get pre-qualified today!