Your Credit Score and What It Means

How does your credit score affect your ability to get a loan? How do they affect the interest rate and the points you have to pay? Absolute Mortgage Company, LLC’s promise to you is to make the mortgage process much easier and affordable. The information we have given you below will explain credit scores and how to improve your score (FICO score).

“FICO” scores were developed by Fair Isaac Corporation. FICO scores use credit bureau information to obtain a score which reflects how likely someone is to make their loan payments on time. FICO scores range from approximately 350 to 900. The higher the score, the lower the Probability of default on the loan. Lenders judge your willingness to repay by looking at your past credit history. Generally speaking, someone who has made payments on time in the past will probably do so in the future. Home mortgage lenders recently began using credit scores to help in the underwriting process.

Your score is based on your past payment history, the amount of credit you have outstanding, the amount of credit you have available, and other factors. Credit scores have proven to be very good predictors of whether a borrower will repay his or her loan according to Fannie Mae and Freddie Mac (two large investors in mortgage loans).

How can credit scores affect the interest rate of your loan? Just as credit scores are one factor in determining if you qualify for a loan, they may also be a factor in determining the interest rate of your loan. Your credit score could also be a factor in whether you are charged points. Points are a percentage fee of the loan amount. Applicants with lower credit scores may pay higher prices for their loans because of the higher risk of default and loss on the loan. Many home loans are sold to investors. Those investors along with Freddie Mac and Fannie Mae use credit scores as part of their analysis when pricing loans they buy from Lenders because of the risk of default.

There are other factors as well that determine pricing on loans such as the type of property securing the loan; the value of the property compared to property values in the area; the amount of borrower’s equity in the property; the Lender’s costs to make the loan; and the type of loan selected.

How can I improve my Credit Score? It is not possible to quantify in advance exactly how each item in your credit history impacts your credit score because each borrower’s credit score is a reflection of his or her unique credit profile. For example, no one can tell you how much your credit score will be affected if you pay off a delinquent account or cancel a credit card. However, there are things you can do to improve your credit profile. Some of these include:

The Number of Trade Lines. The number of credit cards, lines of credit and other types of credit (known as trade lines) you have available will affect your score. If you have a lot of trade lines, this may decrease your score because of the risk that you might not be able to pay off all of your accounts, and may affect your ability to pay off your mortgage loan. You should consider canceling credit cards that you do not use regularly or choose 2-4 cards to use and cancel the rest. Closing an account Voluntarily will not have a negative impact on your credit score. Reconsider accepting “pre-approved” offers for credit cards. If you do, cancel a card in its place. On the other hand, if you have NO trade lines, this will decrease your score. Lenders want to see that you have available credit and see your history of paying the monthly payment.

Making Timely Payments. This is the best way to increase your score! Don’t be late! Foreclosures, bankruptcies, judgements, and delinquencies will definitely decrease your score.

How You Use Credit. The amount you owe on each of your cards will also affect your credit score. The lower the amount outstanding, the more likely it is that your score will be higher.

Do Not Apply For Credit You Don’t Need. Whenever you apply for credit, the creditor will obtain a credit report from one or more of the three credit bureaus. Each credit inquiry will stay on your record and will affect your score. Once they order this report, your score will be affected regardless of whether you were approved, denied, or withdrew your application. Before you give your social security number to someone, make certain you know HOW they are going to use it. A lot of times people apply for auto loans or mortgage loans at multiple locations. Generally, the credit scoring companies will consider all auto or mortgage loan inquiries received within a 14 day period as one inquiry so the additional inquiries will not affect your score.