How does my credit score affect my mortgage loan application?
Today we will look at credit reports for a potential mortgage borrower, what impacts the score, and how to improve your score.
When a lender runs a credit report on a potential borrower, there are three National Repositories that will report a credit score. They are:
1. Equifax
2. Experian
3. Transunion
Most lenders will use the middle of the three credit scores to determine what type of loan and what interest rate a borrower qualifies for. Generically speaking, the higher the score, the lower the interest rate a consumer will be offered.
These three reporting entities will provide a credit score that is used to determine the risk associated with a particular borrower regarding repayment of the loan. A number of credit related variables are used to calculate the credit score. The credit score is used as a predictor as to the likelihood that the consumer will have late payments in the next 24 months. The lower the score, the greater likelihood that the borrower will be late on a payment or payments.
What are the variables that have the greatest impact on the credit score and their relative weight in the scoring?
Past Payment History – 35%
-Late payments are shown for payments that are 30, 60 and 90 days late.
Current Account Balances – 30%
-Any account that has a balance of greater than 30% of the available credit limit will reduce the credit score. Balances of more than 50% will result in even lower scores.
Credit History – 15%
-How long have you had the account? Typically, the longer the better.
New credit cards will lower your score at first.
-Closing out an account will have a negative impact on your score.
Types of Credit – 10%
-The most heavily weighted type of credit is those with finance companies
Credit Inquiries – 10%
-Too many inquiries will result in lower scores
The following table will provide information on the length of time that your credit will be impacted by certain events.
Payment History………….7 years(Date of last activity)
Collection accounts………7 years(Date of origination)
Judgments………………..7 years (filed)
Chapter 7………………10 years (entry)
Chapter 13……………….7 years (entry)
Inquiries………………….2 years /90 days
Tax Liens…………………7 years / (PAID)
By law, there are some factors that cannot be used in the scoring model.
Race/Nationality
Gender
Age
Religion
Marital status/Sexual Preference
Employment/Length of Employment/Position or Title
Income
Address
Interest rate charged on a particular credit card
In summary, to receive the highest credit scores, you should have 3-5 credit lines that you pay on time and keep a balance of less than 30% of the credit limit. Spread out the use of multiple cards so that you have a low balance on all of them.
Please feel free to contact me if you are interested in learning more about how to increase your credit score or if you have any questions regarding credit and/or mortgage loans.
NMLS # 838973
Keith Harris
Senior Loan Officer
Intercoastal Mortgage Company
Direct: (703) 259-0788
Cell: (703) 395-6601
The JS Realty Team – not only serving Brambleton, serving all of Northern Virginia.