Buying a new home is a big step, and often the largest financial decision many people will ever make.
Do you have everything you need to make the best decision?
Before you jump into the homebuying process, you need some very specific information, and that means getting your hands on your credit report.
While most people feel like they have a good handle on their credit rating – or at least can say that they know whether it’s leaning toward the good or bad side of the spectrum – the only way to know for sure is with an actual credit report.
Where Can You Find It, and Does It Cost Money?
While there are a number of paid services that constantly monitor your credit rating to alert you if concerns arise, you don’t need those in order to get a mortgage.
You can go to the website: www.annualcreditreport.com and access your credit rating. It’s your information, and you’re entitled to a free copy of your credit report every 12 months from each credit report company. This is the exact same report that mortgage lenders will see, which will give you a better idea whether or not you can qualify for a loan.
What Is a Credit Score, and Who Provides It?
A credit score is simply a three-digit number that ranges from 300 to 850. The higher the score, the better the credit.
There are three primary credit reporting agencies and they all use the FICO scoring system. Those agencies are Equifax, Experian and TransUnion.
When a mortgage company requests a credit report, they will actually request one from all three agencies, and then that information will be merged into a single report.
This is important because nearly every credit report will show different credit scores. They may all be using the same scoring system, but they may not be using the same information.
These numbers could be affected by the date that credit information was submitted and processed, or the time it takes the reporting agency to update its database.
Getting all three reports at once makes it easier for the lender get the most accurate credit ratings.
How Is Your Credit Score Calculated?
For most of us, words like “algorithm” tend to worry us, because it feels there’s probably a lot of math going on behind the scenes that won’t make much sense to mere mortals.
In this case, the FICO scoring algorithm is a proprietary system, so all the calculations are owned and copyrighted, and we don’t even get to look at them.
They don’t keep it secret just to keep everyone in the dark, though. They don’t release these algorithms because they don’t want people trying to manipulate the system.
What we can say for sure is that there are five basic categories that the FICO model uses to evaluate credit scores, and they are:
- Payment History – This is estimated to be about 35% (the largest percentage) of your credit score. Why? Because whether or not you pay your bills is extremely important to someone who is about to lend you a large amount of money.
- Amounts Owed – This is around 30% of your score. This is a tricky one, because it’s natural to think that owing nothing would be preferable. However, most creditors want to see the money move, so they’re actually looking at your balance-to-credit ratio. You don’t want to owe too much, but it’s okay to make use of the credit you have.
- Length of Credit History – This is probably 15% of your total credit score. It’s mostly a measure of how long you’ve been using credit, though it also shows how often you used credit, and how long since the last time it was used.
- Credit Inquiries – Maybe 10% of your score. This is about the number of times you’ve requested credit, even if, in the end, you didn’t receive it. If there are a lot of inquiries in a short time, it may indicate some financial questionability.
- Types of Credit Used – Also about 10% of your score. This looks at how you use your credit. Are you paying a mortgage or credit card debt? Consistent mortgage payments are going to weigh more heavily than regular payments for some small home appliances.
You Can Make a Difference in Your Credit Score
If you discover that your credit score isn’t quite what you thought, then you may choose to wait a while before applying for a mortgage.
The most effective way to start rebuilding your credit is to focus on your payment history and the amounts owed, since they make up 65% of your total credit score.
It’s also important to remember that credit scores are weighted a little more toward more recent credit activity, so if you work hard to make your payments on time and keep your balances where they ought to be, you can start seeing a change for the better.
With good credit management and a little time, all credit can be repaired.
Contact us to learn more about getting a credit report and how a credit score impacts your mortgage in Seattle and surrounding areas.