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Archive for the ‘Credit Score’ Category

Have you been turned down for credit lines or loans; or just haven’t been offered the low rates on your mortgage that you hoped for because of your lower credit scores.

Why are Credit Scores so important?

Credit Scores: Since the underwriter of the loan will never meet you, the only representation of your financial character is your credit score. Therefore the most important factor in mortgage shopping is your credit score. A good or bad credit score will dictate the difference between a great low rate or a higher rate and even the difference between approved or declined. Credit scores can range anywhere from 300-850. In general, anything under a credit score of 500 will not get financing from conventional banks. With sub 500 scores you may have to resort to private lenders which have very high interest rates. 500- 550 credit scores will not get good rates, but can still benefit if they have good compensating factors (good payment history, low LTV, etc…). Scores of 550-620 will get O.K. rates. Scores of 620-680 and over will get the best rates. All, of course, depending on the other factors (income, LTV, debt to income ratio, cash out, etc…).

How does credit scoring work?

Credit scores are calculated using a formula to evaluate your “probability” of making your payments on time over the next 12 months. So a high credit score (700 credit score) is more likely to pay on time over the next 12 months (less risk to the bank) than a person with a low score (550 credit, high risk to the bank).
What is the formula they use? They won’t tell us. But we do know a few things. The most important factors in your credit report are within the previous 12 months. Important factors in these previous 12 months include:

• Payment History: Have you been late, and if so how many times and how late were you? -30, 60, 90, or 120 days late? 60 days late will have a more negative affect on your score than 30 days. 90 days is much worse than 60, etc…Anything 30 days and over can seriously damage your credit.

• Balance to high credit limit: If you have a credit card with a $1000 limit and you have a balance of $900 this will be considered a balance ratio of 90%. This has nothing to do with LTV. So, if your house is worth $350,000 and you take out a new loan for $200,000; your high credit limit will be based off of the starting balance of $200,000, not the value, making it a 100% balance to high credit ratio. Anything over a 75% balance to limit ratio can affect your score negatively. If you just bought a car or a house it will more then likely affect your score in a negative way, since the limit and balance ratio will be at almost 100%. Time will heal though. The amount of time a loan has been established will counterbalance the high ratio on car and home loans after some time (a year or 2). Keep in mind though that one account with a high ratio will not be as harmful if you have other accounts at 50% or less. So if you have a recent home or auto purchase, you should at least keep the other accounts (credit cards, etc.) at 50% or less if not 0%. If you are about to shop for a home do not make any major purchases in the previous 12 months, if you can help it.

*Note: Because of the reasons stated above it should be obvious why a purchase charged to a store credit card with no payment due for the first year, as some electronics or department stores promote, would be hazardous to your credit score.

• Length of time since credit has been established: A brand new credit line (even with zero balance) will negatively affect your score. Because of the short length of time the account has been established, and the fact that a credit inquiry will be reported when opening a new account, you should not apply to any new credit lines before you begin to shop for a mortgage. The longer the account has been established the better. Which means if you have accounts open, even if you don’t use them, do not close them out. The old accounts have zero balances and a good length of time since establishing them, giving you 2 positives in factoring your score.

• Inquiries: Since the reason creditors inquire about your credit history is usually because you’re applying for a new credit line or loan; if too many inquiries are reported over an extended period of time, it will negatively affect your score. An extended period of inquiries will appear as if you keep getting turned down for loans and then reapplying with other companies. However, since credit agencies are aware that consumers compare rates and companies when shopping for things like car loans and mortgages, there is a 14 day window in which the credit agency allows consumers to have multiple inquiries (within reason). The FICO score treats multiple inquiries in a 14 day period as just one inquiry and ignores all inquiries made within 30 days prior to the day the score is computed. One inquiry will generally knock no more than 5 points off a score. If a person is going to shop for a mortgage with other brokers after we speak to them, we like to fax or mail them a copy of their credit report so that nobody else has to pull it again thereby lowering there score. We started doing this after we found that people would eventually come back to hire us as there Mortgage Consultant (broker) after speaking with many other brokers, each of who pulled there credit as well. By the time we looked at there credit score after all these inquiries were made by other companies, there scores would be too low to offer them the same rate they would have qualified for originally. We would have to wait a month or two to let the scores come back up, or do some sort of credit repair.

• Time since delinquency: Any late payments or collection accounts will affect your credit score greater the more recent the delinquency. Example: a 30 day late payment last month would affect you more than a 30 day late payment 6 months ago.

• Collection Accounts: Pay off any collections as soon as possible. Even if the collection account is 2 years old, these creditors report to the agencies every month so that the collection is still recent (as far as the formula to calculate credit scores is concerned). If you pay off the collection, it remains on your record as paid, on whatever date it was paid. So you want to pay them off as soon as possible, giving you a length of time since delinquency. The negative affect of the collection diminishes in strength every passing month.

*Credit scoring is all based on your probability of being late over the next 12 months, based on your previous 12 months. If you remember this, all of the above makes complete sense and it will be easier to keep good credit scores.

** Also read sections: Mortgage Rates, Refinance My Mortgage, Purchasing a Home