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Your Credit and Credit Scoring

THE MORE YOU KNOW ABOUT CREDIT SCORING
THE BETTER YOUR CHANCES OF THE LOWEST MORTGAGE RATE
THIS IS THE WAY MANY LENDERS NOW QUALIFY MORTGAGE APPLICANTS

Credit scoring-assigning numerical ratings to consumers on a basis of their credit history-has been used for more than 30 years by auto lenders, credit card issuers, and other extenders of consumer credit. Now it's being used to determine whether you qualify for a mortgage.

Credit scoring use reports from any of three major credit repositories (Equifax, Experian and Trans Union) to grade consumers on a 900-point scale. The scores are calculated by the credit bureaus, NOT the lenders. The credit score isn't a permanent part of any credit history but rather a snapshot of a mortgage applicant's credit history.

Fannie Mae recommends that lenders do comprehensive reviews of borrowers with scores between 620 and 660. If the score is lower than 620 (as low as 585) the downpayment should be at least 30 percent in order for borrowers to qualify for a conventional mortgage.

Those not qualifying may have to turn to sub-prime mortgages, which carry rates one-quarter to 2 percentage points higher than prime on conventional mortgages. The fees and closing cost are also higher.

HOW THE MATH WORKS

Every scoring model uses the same data to establish a score, but the weight attached to each component of the score is different with each model. It's the weighing that the developers of each model carefully guard, even going as far as not wanting lenders to reveal the scores.

The object is to establish a weighted numerical measurement that reflects a borrower's likelihood of repaying the mortgage loan on time - the borrower's default risk.

The more than 100 variables used in credit scoring include the following:

  • Existing credit cards
  • Other open or active accounts, their type, the length of time credit has been available, and credit levels.
  • Current level of indebtedness and its relation to available credit.
  • Outstanding auto loans and other loans.
  • Credit performance, including the number and severity of late payments and delinquencies.
  • Number of inquires or attempts to acquire additional credit, especially in recent months.

SAY 'NO' TO NEW CREDIT

For buyers to attain the best possible credit score they should avoid and behavior that will negatively impact the credit score before their loan closing.
Here are some expert tips:

  • Don't order any furniture or appliances for the new home even if no payment is immediately due, such as the no-payment-till-spring deals.
  • Don't let any stores run a credit check for a new credit card when you're shopping or looking for new furniture or appliances.
  • Don't get new credit cards, even when stores offer a discount in return for applying for a card.
  • Pay all credit card bills on time, even if it means paying utility bills late.
  • Refuse increases in your credit limit if the increase is more than you need or is high relation to your income.
  • Pay off and close any existing accounts with finance companies, since they're viewed negatively in the scoring.
  • Close out unused credit card accounts.
  • Maintain at least one of your oldest cards to show a lengthy credit history.

READ YOUR CREDIT REPORT

Buyers can get copies of their reports from each credit repository. Here's how to contact then.

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407-629-5915 or 800-258-5915
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