Your Credit History and Credit Score

The most important factor considered by lenders when evaluating home loan applications is credit score. There are three credit bureaus Equifax, Experian and TransUnion. Each bureau has a computerized model that gives each individual a credit score based on how they have handled their credit in the past. You could consider it your report card on your handling of your money and credit. If you have done well you have a good score. If you haven't (for whatever reason) your score could be very bad indeed.

Credit scores range from 300-850 with 850 being the highest score possible. Mortgage lenders obtain your credit scores from all three credit bureaus. They use the middle credit score to determine your qualification for a home loan. There is no hard minimum credit score necessary to qualify for a loan. The reason for that is that the mortgage market changes fairly often. This means that in response to changes in the mortgage market lenders will from time to time raise or lower the minimum score they are looking for in order to consider a loan.

The credit scoring models in use today were developed by Fair Isaac Company. The exact calculations that go into credit scores are proprietary information and are therefore not made public. However, they have published a basic outline of the major categories that are important in determining the credit score. These categories are: Payment History (35%), Amounts Owed (30%), Length of Credit History (15%), New Credit (10%), Types of Credit Used (10%). The percentages indicate what portion of the overall score is based on that category. More information can be obtained from www.myfico.com.

The age of your credit accounts (how long they have been open) and the types of credit accounts you have are very important as you can see from the categories above. As a general rule you want to have four to six credit card accounts, a car loan or two and maybe a personal loan. If you open all of those accounts at the same time the initial impact on your credit score will be negative, but as you maintain those accounts in good standing your credit score will steadily improve. Some people cannot get a home loan simply because they have too little credit experience.

The amount of debt you have compared to the amount of available credit can have a big affect on your credit score. If your credit cards are "maxed out" your score will be lower than it would be if you were carrying small balances on those same credit cards. It is usually a good idea to pay your debts down to under 50% of the total credit limit. As a general guideline, it is best to keep balances you are carrying on your credit cards between 30% and 50% of the credit limits. You should not close accounts that you have paid off. If you pay an account off, just leave it open with a zero balance.

From time to time everyone has a situation that arises that causes them to have to pay a debt late. Paying a debt late is really no big deal except for the late fees you incur. Payments made a few days or a couple of weeks late generally will not be reported to the credit bureaus and therefore will not affect your credit score. The important thing is to make your payment before it gets to thirty days late. Once a payment is thirty days or more late, it will generally be reported to the credit bureaus and will have a dramatically negative affect on you your credit score. Though every payment over thirty days late will have an affect on your score, the more recent they are and the larger the number you have, the worse your score will be. If there is any single factor that drives a credit score down more than others it is the number of payments that were more than thirty days late. This is also the hardest factor to compensate for. Even if you catch up your payments on all of your accounts and keep them current, the damage is already done and the only thing that will lessen its effect is time. The more time that has passed since the last time you were thirty days or more late on one of your accounts, the less damage that late payment will do to your credit score.

Meeting the minimum score doesn't necessarily mean you will be approved for a loan. It just means that the lender will be willing to look closer at your qualifications in order to determine whether or not they will be willing to lend you money.

If your credit score is already low for some reason, the American Home Buyer Service will take that into consideration and you will be told exactly what you will need to do to improve your score.

If you feel that you need help improving your credit score in order to qualify for a home loan fill out our consultation form.