Homebuyers Handbook

14

Credit Scoring
A credit score (also called your FICO score referring to Fair Isaac Corporation that provides the analytical system used to calculate the score) is designed as a numerical representation of your creditworthiness. Mortgage lenders use credit reports to determine whether you have the ability to pay them back and if you will pay them back. The higher the credit score, the more likely a borrower is to honor the terms of their financial contracts with lenders. Lower credit scores represent more perceived risk of untimely payments or default, which may be translated into higher interest rates to offset that risk. All mortgage lenders will pull a credit report (called a tri-merge credit report that displays credit history and scores from all three credit bureaus) and use the results of that report for approval and determining the applicable mortgage rate. With more than one borrower, the credit report for all borrowers will be considered. Mortgage lenders are not credit experts and will typically refer those with lower credit scores to credit restoration or repair companies, whose primary business is to consult and execute credit score improvement plans. In general, for credit improvement and maintenance, you should concentrate on paying your bills on time, paying down outstanding balances, and not taking on new debt in the six months before purchasing a home. There are five main criteria that make up a credit score:
30% Available Credit your credit limit minus the balance owed tells how much available credit you have 35% Payment History on-time or late payments 15% Length of History how long since account opened 10% Number of Inquiries every time you apply for credit, an inquiry is logged on your credit report 10% Type of Credit mortgages, installment loans, revolving credit cards, etc.)

30%

15% 10% 10% 35%