Mortgages and Your Credit Rating

Why Is Good Credit So Important When Applying For A Mortgage
When a person is getting ready to buy a home one of the things a loan officer looks at is a person credit history. Now when they look at a person credit history they do pull all three credit reports and scores and then they take a mid score and that determines whether or not a person will get approved for a mortgage. Now you may be wondering why is good credit so important when applying for a mortgage? Now there is a couple of reasons. Lets take a look at some of them shall we?

First and foremost one of the most important reasons is because it gives the lender a good indication as to whether or not the borrower is a good credit risk or not. Now the reason that is so important is because they want to make sure they have a reasonable chance of getting their money back. Now a credit score helps them determine this is because one of the biggest factors in a person credit score is their repayment history.

What is their repayment history? Well did they make their payments on time or did they have a habit of running late on their payments? Usually they show 30, 60, 90 and 120 days past due. If a person has a history of making payment late that is a red flag for lenders. Now the opposite is also true a good repayment history and goo credit is a good indicator and helps a person qualify for a mortgage.

Now the other reason good credit credit is a important is because it helps people qualify for better interest rates. The better the credit score is the lower the interest rate and the lower the monthly payment which helps the borrower save money and at the end of the day that is always a good thing.

Where Can You Get Free Credit Information?
Originally signed into law in 1970 what is now called the Fair Credit Reporting Act or FCRA ensures that everyone is able to get a free copy of their credit history at their own request once every year. There are several ways to get this information; via the official, central website, by calling the toll free number or by sending the request for your free credit report by mail. If you go to the website your information will be made available to you immediately. By phone or mail you will have to wait fifteen days or more. This may be longer during holidays.

Your credit information is compiled by three different, nationwide reporting agencies. These agencies are, Equifax, Experian and TransUnion. These agencies gather information about your financial transactions including bill and utility payments, loan payments or defaults and housing information. All of this data is cross-referenced and then condensed into a credit score.

This score is then used to qualify (or disqualify) you from things like insurance, employment or new loans. Your credit score might dictate whether you will have to pay a deposit for utilities when you move to a new home or may prevent you from getting a specific rate on car insurance. It is important to know your credit score so that you can improve it over time. It is also important to know what it is before you apply for new loans or anything else that will require a fair to excellent credit score.

It is also important to monitor your credit reports to watch for signs of identity theft. Strange transactions on your credit history could indicate that someone is using your information and this could lead to ruined credit before you are even aware of a problem. Monitor your report at least once per year so that you are protected.

NOTE: Is Getting Your Credit Report Really Free?

Factors That Make up Your FICO Credit Score?
The FICO credit score is a credit scoring model that uses several different data inputs to score one’s credit history and worthiness. Here are the five primary factors that are used to determine a FICO score:

Payment history accounts for about 35 percent of a FICO score. Past payment history on both installment and revolving loans can be indicative of a borrower’s future repayment behavior. In addition, it demonstrates that the borrower takes his or her financial obligations seriously. Missed or late payments can have a dramatic impact on one’s FICO score.

Credit utilization accounts for about 30 percent of the FICO score. Borrowers who regularly max-out purchasing power on credit cards, for example, are viewed as being irresponsible with credit. In addition, a high utilization rate may be indicative of financial hardship or reckless spending. Some studies show that an approximate utilization of about 7 percent is ideal.

Length of credit history accounts for about 15 percent of the FICO score. A longer credit history makes it easier for lenders to gauge the borrower’s use of credit and payment behavior. Creditors want to see a long history of timely payments.

The amount of new credit makes up about 10 percent of the FICO score. Borrowers who have recently applied for or established new credit lines may be experiencing some type of financial distress. Access to further credit should only be pursued if necessary or if it makes sense from a financial standpoint.

Your credit mix makes up the final 10 percent or so of the FICO score. This means that it is beneficial to have various types of credit such as installment loans and revolving lines of credit. It is believed that borrowers who have shown the ability to handle different types of credit may represent less risk for lenders.

How to Build a Strong Credit History
So you are looking to make a major purchase but you know your credit is not near where it needs to be. Now you are wondering how to build a strong credit history? Well a lot of people are wondering the same thing, what are the best ways to build a strong credit history? Fair enough let’s look at some ways you can.

First and foremost you always want to pay your bills and pay them on time. One of the biggest factors in your credit score is your repayment history. Now you may be thinking what is the difference if I just run 30 days behind every once in a while. Well remember running 30 days past due tells potential lenders that you do not pay your bills when they are due and that can prohibit you from getting qualified for a mortgage or major purchase down the road.

Now another way to build a strong credit history is to make sure you don’t max out your credit balances. Usually a good amount is to keep your balances about 30% of their credit limits. Always keep that in mind. Now the next tip is to probably going to surprise some people but it is very crucial.

You don’t need a lot of credit but the credit you do have you want to keep open for a while. The reason this is important is because it shows your payment history over a longer period of time. So if you have a Mastercard and have had it for over five years and have had a good repayment history that is going to be a positive for you. Normally if a person is looking for a major purchase like a home you need to have three to five open trade lines with good repayment history and at least 6 months of payment history.

NOTE: A Few More Ways To Improve Your Credit Score

How To Fix Errors On Your Credit Report
Unfortunately, not everyone has a good credit score but there are ways to improve it if you notice any discrepancies on your report.

First, you need get a copy of your credit report to see if there are any errors on it. You should examine it carefully for any such errors. When you find the errors, the first step is to notify the credit bureau that you see the errors on. If they are reporting it, it is likely that another bureau is reporting the error as well. You should be sure to check all credit bureaus.

There is really no need to hire someone to assist you with removing errors from your credit report because it is simple to do, it may just take some time. Under the Fair Credit Reporting Act, you have the right to dispute the errors. Usually this is done with a simple letter to the bureau. They will then investigate it from there. If you have not heard anything back from them in a few weeks, you can follow up with the agency. You can submit your report online with come bureaus such as Equifax and Experian. You must submit it through the mail with TransUnion.

Be sure to check your credit report annually for any errors as they can occur at any time. Credit monitoring services can do this for you but since you can get a free copy of your credit report once a year, it would do no harm to skim through it at this time.

What Does Your Credit Score Tell A Mortgage Banker?
FACT: A bad credit score isn’t very helpful in buying a house, especially if you’re not buying it with your own money.

Since most people don’t have money to buy their homes, they usually go to their bank and ask for a loan. From then on a mortgage banker or loan officer would work with you to find out how much of a loan you can procure from the bank in order to buy a home. However, there are many things that can affect the loan amount you receive the bank. The most common effect on the bank’s loan is your credit score. As said before, bad credit isn’t helpful when buying a home. As a result, a bad credit score means that you probably won’t get a high loan amount. Here is some more information about credit scores and banks.

A low credit score tells a mortgage banker that you have some trouble paying off debts and can obviously not pay off the full price of a home on your own. On the other hand, a high or pretty solid credit score tells a mortgage banker that you will most likely get a large loan amount and that you are pretty organized in conscientious when it comes to paying off bills or debts. Overall, no matter what your credit score is, your mortgage banker will work with you to find a perfect loan amount.

Your credit score can play a big part in getting you a loan for your home. Just remember to strive for a solid and strong credit score in order to have a smoother loan process with your mortgage banker.

Another artice from Gina Wilson – Credit & Loans Specialist Blogger.

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