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4 Things Every First Time Home Buyer Needs to Know About Credit Scores

December 19th, 2017 11:14 AM by Andrew Walter May

Factors that influence your credit score

If you are looking for a mortgage to buy your first home, you need to know your credit score and understand the basics of how it will ultimately influence your monthly mortgage payment.  

Before deciding on what terms to offer you on a loan (which they base on the "risk" to them), lenders will want to know two things about you: your ability to pay back the loan, and your willingness to pay back the loan. For the first, they look at your income-to-debt obligation ratio. For your willingness to pay back the loan, they consult your credit score.

 

The most widely used credit scores are FICO scores, which were developed by Fair Isaac & Company, Inc. (and they're named after their inventor!). Your FICO score is between 350 (high risk) and 850 (low risk).

1.     It Is Not About How Much Money You Have

Credit scores only consider the information contained in your credit profile. They do not consider your income, savings, down payment amount, or demographic factors like gender, race, nationality or marital status. In fact, the fact that they don't consider demographic factors is why they were invented in the first place. "Profiling" was not as dirty a word when FICO scores were invented as it is now.

Credit scoring was developed as a way to consider only what was relevant to somebody's willingness to repay a loan.

2.     You Need to Show That You Make Payments on Time

Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of inquiries are all considered in credit scores. Your score considers both positive and negative information in your credit report.

Late payments will lower your score, but establishing or reestablishing a good track record of making payments on time will raise your score.

3.     Some Parts of Your Payment History Are More Important Than Others

Different portions of your credit history are given different weights:

  • 35% t of your FICO score is based on your specific payment history. 
  • 30% is your current level of indebtedness. 
  • 15% is the time your open credit has been in use (ten-year old accounts are good, six-month old ones aren't as good) 
  • 10% is types of credit available to you (installment loans such as student loans, car loans, etc. versus revolving and debit accounts like credit cards). 
  • 5% is pursuit of new credit -- frequency of credit scores requested.

4.     You Need At Least Six Months to Establish Credit History

Your credit report must contain at least one account which has been open for six months or more, and at least one account that has been updated in the past six months for you to get a credit score. This ensures that there is enough information in your report to generate an accurate score. If you do not meet the minimum criteria for getting a score, you may need to establish a credit history prior to applying for a mortgage.

If you have questions about how your credit score will impact your mortgage rate, give American Dream Residential a call at 919-771-3379. With nearly 25 years of experience in the finance industry and a perfect track record of 0 Better Business Bureau complaints, our team makes sure you are comfortable with the mortgage process and happy with your experience. 




Posted by Andrew Walter May on December 19th, 2017 11:14 AM

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