What makes up your credit score?Ultra-low mortgage rates have sped up the housing market’s recovery during the last year, with home sales and home prices both on the rise.
During the third quarter of 2012 alone, $521 billion in new mortgages appeared on consumer credit reports, marking the fourth consecutive increase in mortgage originations on a quarter-over-quarter basis.
Activity in the housing market shows no signs of slowing down, with the Mortgage Bankers Association forecasting $1.3 trillion in mortgage originations this year.
Purchase originations are projected to reach $585 billion during 2013, marking a 16 percent increase over 2012. Meanwhile, refinances are expected to reach $785 billion in the coming year.
Between low interest rates and affordable mortgage programs like FHA loans and the three-percent down Conventional 97 program, savvy home buyers should be looking to lock their mortgages before mortgage rates rise and home prices rise more.
Before you begin the process of obtaining a mortgage, though, get your financial affairs in order. The first step deals with your credit report.
What Is A Credit Report?
A credit report is a record of your financial history, detailing everything from auto loans and credit card balances to liens and bankruptcies. Generally, the information found in your credit report lasts for seven years. And, while not an official part of your credit report, credit scores are “grades” based on the report’s information.
For today’s home buyers and refinancing households, having a good credit score can mean access to lower mortgage rates and mortgage programs with smaller downpayment requirements.
However, your credit scores are used in other aspect of life, too :
- Insurers can use your credit score to determine your premium schedules
- Employers can use your credit score to determine whether to hire you, promote you or reassign you
- Landlords can use your credit score to determine whether to rent you a home or apartment
- Government and judicial agencies can use your credit score for program eligibilities and legal matters
Your credit report is your first impression in the financial world. It will often be used to estimate your level of monetary responsibility. This is one of the many reasons why keeping your credit score high is paramount.
Mortgage Lenders Use FICO Scoring Model
There are tens of credit reporting companies and you’ve likely seen their ads on TV or online. However, in the mortgage world, there are three companies which matter most — Equifax, Experian and TransUnion. Collectively, these three firms are called the “major credit bureaus” and each sells a multitude of credit scoring products.
For mortgage purposes, each sells one credit score of consequence to mortgage applicants :
- Equifax : Equifax Beacon 5.0
- Experian : Experian/Fair Isaac Risk Model v2
- TransUnion : FICO Risk Score 04
When a mortgage lender “pulls your credit”, these are the three credit scores which are reviewed. Your lender will then take the middle of the three scores, and this will be your assigned credit score.
For example, if your credit scores are 620,640 and 700, your “score” is 640. As another example, if your credit scores are 700, 719 and 720, your credit score is 719. Credit scores are not rounded up or averaged.
Credit scores are called FICO scores, named after the Fair Isaac Co., a pioneer in the credit scoring space.
How To Boost Your Credit Scores
When you order a credit report, along with your credit scores, the credit bureaus often offer several ways by which you can improve your credit score.
For people whose credit scores are low, this can be a roadmap for FICO improvement. For people whose credit scores are very high, it may be extraneous information; you can’t get “bonus points” for having an extra-high FICO.
Take the credit bureaus’ recommendations under consideration, but remember that there are only a few fool-proof ways to improve your credit score.
- Pay your bills on time, every time
- Keep your credit card balances low as compared to your total available credit
- Apply for store charge cards only when absolutely necessary
- Pay doctor and utility bills when they’re due
- Keep old credit cards open, and use them periodically
Ideally, your credit card balances should not exceed 30 percent of the card’s available balance. If you are having trouble meeting this requirement for a high credit score, ask your credit card company to raise your credit limit.
Lastly, if you’ve had a derogatory event on your credit report, avoid credit repair companies until you’ve done your due diligence. Often, time is the best healer of a “bad credit report”.
About the Author
Dan Green (NMLS #227607) is an active loan officer with Waterstone Mortgage. You can also connect with Dan on Twitter and on Google+.