Credit scores important for mortgage approval
If you are getting ready to buy a home and take out a mortgage, one of the most important things in this process is your credit score.
Your credit score is a huge factor in a lender deciding whether or not to lend you the money for a mortgage. If you have a bad credit score, you could greatly hinder your chances of being approved for a mortgage.
Before you even begin the mortgage application process, you should understand your credit score and all of the components associated with it.
An article by Janet Wickell of about.com, “How your credit score is calculated: Understanding your FICO score and how it affects home buying,” gives some important information on the anatomy of a credit score.
Credit scores are sometimes called FICO scores because the software used to compute the numbers was created by the Fair Isaac Corporation.
“Home buyers who are seeking a mortgage find out early-on that their credit score plays an important part in the home buying process and in determining the interest rate that a lender offers. A credit score is a number that lenders use to estimate risk. Experience has shown them that borrowers with higher credit scores are less likely to default on a loan.”
When you go to inquire about your credit score there are a few things to keep in mind. First of all, remember that there are only three major credit reporting agencies out there, so be aware of any agency that tries to get your social security number to pull your credit score – they are probably fraudulent.
“Your bank will pull credit reports and scores from all three major credit reporting agencies: Transunion, Equifax and Experian. They'll probably use the middle score to work your loan application. Ask your lender to explain which credit scores will be used and how they affect your loan application.”
Also, when you start shopping around for a loan and mortgage lender, be sure that you do not pull your credit score too many times, because this could hurt your number.
“Credit scores are generated by plugging the data from your credit report into software that analyzes it and cranks out a number. The three major credit reporting agencies don't necessarily use the same scoring software, so don't be surprised if you discover that the credit scores they generate for you are different.”
Your credit score is dependent on a variety of factors, but there are some approximate values that are available to see how much importance each aspect has.
Your payment history is 35 percent of your total score, the amounts you owe are 30 percent, the length of your credit history constitutes 15 percent, the types of credit used is 10 percent and your new credit is 10 percent of your overall credit score.
Credit scores range greatly from person to person, but paying your bills on time and not overextending your credit limit can really help to improve your credit score immensely.
“Credit scores (usually) range from 340 to 850. The higher your score, the less risk a lender believes you will be. As your score climbs, the interest rate you are offered will probably decline.”
“Borrowers with a credit score over 700 are typically offered more financing options and better interest rates, but don't be discouraged if your scores are lower, because there's a mortgage product for nearly everyone.”
Your credit score could be the thing that makes or break your chances of being approved for a loan. Take this very seriously because once you mess it up, it is very hard to fix it.
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