Original Source: Massachusetts Real Estate Blog
Credit scores are one of the largest factors that lenders use in evaluating whether or not to lend money to a borrower. Credit scores are designed to measure the risk of someone defaulting by taking into account various factors in a person’s financial history.
If you are considering purchasing a home one of the things you want to be sure of is the accuracy of your credit report. The economic down turn of the last five years has vastly changed the mortgage landscape all across the country.
If you ask any mortgage broker they will tell you that things have changed in the mortgage industry on a monthly basis. Given the increase in foreclosures and short sales lenders have increased their standards when evaluating the potential for default of every borrower.
One of the tools that lenders use to evaluate the borrower to repay a loan is what’s know as their FICO score. The FICO score was developed by the Fair Issac Corporation. The company was founded in 1956 and their scoring programs are often used to assist lenders in managing credit accounts, detecting credit fraud and automating lending decisions. The FICO score is a standardized approach that helps lenders deliver decisions on loans in an efficient manner.
FICO scores can range from 300 to 850 with 850 being the maximum possible score. According to the FICO scoring system there are five factors that determine a borrowers score:
- 35% — A borrowers payment history carries the most weight – Late payments on bills including a mortgage, credit card or automobile loan, can cause a consumer’s FICO score to go down. Paying your bills according to the contract you signed will over time help improve a consumer’s FICO score.
- 30% — The borrowers credit utilization – The ratio of current outstanding debts such as credit card balances to the total available revolving credit ( your credit limit). You can improve your FICO score by paying off debts and lowering your utilization ratio. The closing of existing revolving accounts will typically adversely affect this ratio and therefore have a negative impact on your FICO score.
- 15% — The length of credit history – As your credit history gets longer, assuming you pay your bills on time, it can have a positive impact on your FICO score.
- 10% — The types of credit used (installment, revolving, or consumer finance) – There is some credit given to having a history of managing different types of credit.
- 10% — A recent search for credit or amount of credit obtained recently- If you have multiple credit inquiries as a consumer seeking to open new credit, such as credit cards, retail store accounts, or personal loans, it can hurt an your score. Applying for lots of new credit in a short period of time is also viewed as risky and can cause a drop in an individual’s score. What should be noted however is that if you are shopping for a mortgage or auto loan over a short period of time you should not experience a decrease in your scores as a result of these types of inquiries. So if you are buying a home and apply to multiple lenders and they all do their credit checks you are not supposed to be penalized.
FICO scores do not take into account a borrowers salary, employment history, where they work, rental agreements, child support or other such obligations or interest rates on any current loans.
Generally speaking a credit score that is over 720 is often considered an excellent credit score. A score of 680 – 719 is considered good. A score that falls between the range of 620-679 will usually make the lender scrutinize the file further. Having a score that falls between 585-619 will typically disqualify you from getting the best rates. A score below 584 will make many lenders question whether or not they want to do business with you.
There are actually three companies that report credit scores to lenders. They are Equifax, Experion and Transunion. The scoring of these agencies can often vary quite a bit. Each of the bureaus collects different information on the borrowers which can change the final score. Given how the credit scores can differ from the various agencies if you are falling on the edge of one of the credit ranges it may be prudent to apply to more than one lender. For example if you had a score of 675 at one agency it is quite possible you could be 700 somewhere else which could give you a better rate!
It should be noted that the credit scoring model was slightly altered in 2009 and could effect your score either up or down by 20 points.
In the new model credit problems and issues are ranked according to number and magnitude more specifically than before. The new FICO scoring system also focuses less on how many accounts a borrower has and more on the amount of balances carried.
The statistical models that are used for generating credit scores are subject to federal regulation. The Federal Reserve Board’s Regulation B (implementing the Equal Credit Opportunity Act), expressly prohibits a credit-scoring model considering “prohibited biases” such as race, national origin, sex, religion and marital status. The law also states that credit-scoring models must be empirical and statistically sound. In addition, if a borrower is denied a loan based on credit, the lender must state to the specific reasons for the denial. A statement that the person did not score high enough is not acceptable. Thee reasons for denial must be specific. For example there were too many late payments of 60 days or longer.
So how does one go about improving a FICO credit score to purchase a home and get the best rates that lenders offer? The answers are actually pretty simple!
- Pay all of your bills on time every month.
- Pay off all of your existing debt.
- Unused credit cards should not be closed. This can sometimes lower your credit score.
- Do not open a bunch of new credit card accounts in a short period of time.
A few years ago it was not uncommon to hear of mortgage brokers or credit repair companies doing what was known as “doctoring” a persons credit.
A major portion of the FICO score is set by the ratio of credit used to credit limit. What was happening was they would increase the score by simply increasing your credit limit. Some of the credit-repair agencies, for a fee, would report to the credit bureaus that they have opened an account with a high credit limit. The customer could not actually use this account but it would improve the customer’s FICO score due to lowering the balance-to-credit-limit ratio. This is no longer allowed!
When you are starting your home search and getting your pre-approval from a lender one of the other things you should do is get a copy of your credit report from each of the three report bureaus. As a consumer you are allowed to get one free credit report each year from Equifax, Experion and TransUnion.
With this knowledge is hand you should be well armed to position yourself for the best mortgage rate possible!
If you enjoyed this article please drop by my Wordpress Massachusetts Real Estate Blog to see other helpful Real Estate articles and news.
___________________________________________________________________________________________________
About the Author: The above Real Estate information on increasing FICO credit scores to purchase a home was provided by Bill
Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-435-5356.
Have a home to sell in Metrowest Mass? I have a passion for Real Estate and love to share my marketing expertise!
For Metrowest Massachusetts Real Estate and homes see Massachusetts Real Estate. Want to have MLS access to beat other buyers to your dream home? Sign up with no obligation at my MLS Property Finder Site.
I service the following towns in and around Metrowest Massachusetts: Hopkinton, Milford, Upton, Southboro, Westboro, Ashland, Holliston, Mendon, Northboro, Shrewsbury, Hopedale, Medway, Grafton, Northbridge, Uxbridge, Franklin, Framingham and Douglas MA.
Click here to view Bill Gassett's Real Estate profile.
SUBSCRIBE TO MY METROWEST HOMES BLOG via email.
Building lasting relationships by helping people move in and out of Metrowest Massachusetts for the last 24 years.
I really feel there showed be a priority of debt. For example if I pay my home loan on time every month but I'm late on a cable bill once in a while it shouldn't have the same impact.
Great breakdown of how the FICA score gets worked out. I might keep this handy for clients as well as for myself.
Good info Bill....I honestly believe that a lot of buyers don't take into consideration their credit scores until they end up talking to a mortgage broker or real estate agent.....although since all the short sales and foreclosures more people are learning that a good score is essential in the purchase of a home....
John - That was actually a change that was implemented in 2009. The types of issues are now taken into account.
Paul - Thanks..feel free to re-blog it.
Dennis - You are right about that although it seems with all the talk lately about credit buyers are more cognizant about it.
Bill, this is a fantastic post! You have outlined the credit score for a potential home buyer in a way that is easy to understand. Great job! (I am coming back to reblog this one in a bit... :D)
Bill ~ The customer could not actually use this account but it would improve the customer's FICO score due to lowering the balance-to-credit-limit ratio. This is no longer allowed! I had no idea that they did this and it makes on wonder what other scams someone came up with to help get us where we are today. In my eyes this above practice is a lie and I am glad they can not do this anymore.
Bill,
Looks like those figures are off, 115%? I am always interested in hearing about these things. Thank you for the post.
-Ingrid
Andrea - Glad you like the article!
June - It was definately a good change. I think we have all learned lessons from the mortgage fiasco!
Ingrid - I assume you are talking about the adjustment made in 2009 about what lenders consider an Excellent to good score?
Bill, Great information! A buyer called me yesterday asking how she could buy a house. She had big credit issues. I explained that her first step was paying her bills on time and clearing up her credit. I told her that unfortunately now was not her time to buy a house and we should talk next year.
Bill - A very informative article for buyers on how to ascertsin their credit worthiness before they start shopping. Pro-active information like this gets folks into homes. Excellent. I like how you blend the Wordpress Blog with AR. I'm sure this is effective.
Jen - Just think if they buyer had been a little bit more proactive! Timing is everything in life.
Claude - Thanks...much appreciated! You were very observant to notice what I did with the links too:)
Bill--Good information as too many people used to rely on that magic potion rather than the diligence it takes to maintain and keep a good credit score. Understanding what goes into the score is a good way of figuring out how to best maintain it for the future.
Teri knowing how to raise a credit score is always good especially for those folks that are teetering on jumping into a better credit bracket!
thanks for sharing this very useful information for potential home buyers, it def comes in handy!!
Bill, I always like seeing this type of information. Very valuable for the buyers and for us as real estate professionals. ;-)
Bill a quick way to increase Credit Scores by several points is simply by reducing credit card balances to below 30% of the cards credit limit.
You covered a lot of good valuable information in this post.
Carole & Teri - Thanks for the compliments on the article about improving your credit scores!
George - A very simple but great tip indeed!
Bill, Great information! It use to be that buyers could get by with a low credit score but that's not the case now (if they want to buy a house that is). I'm off to re-blog.
Bill, these days it's important to keep up with all of the changes and requirements for maintaining and especially improving credit scores. It seems like it is getting tougher for buyers to get loans and a credit rating is paramount to getting it done!
Marchel & Russell - Thanks for your compliments on raising a FICO score. It certainly is a good idea for buyers to know how to get their credit scores up before they buy a home.
If we could educate buyers to be more accountable of their money, our economy may not be as bad as it is today. Great information. Happy Easter.
Hi Bill! Raising a FICO score seems to be the topic of conversation for a few of my clients this week--I've found that in two cases, major errors were made on credit reports which required very little to remedy the situation but, others do need a few pointers. I will share your post with a couple of folks!
Thanks for the info and have a wonderful Sunday...
Bill - This is a great post to explain credit and what effects the score. Part of the problem we've seen is that when credit cards are paid down, the limits are lowered to that new amount. Making it hard to raise credit scores by lowering debt.
Very good post Bill. You have done a wonderful job explaining the process. But the system has too many holes though. I see the Consumer Credit aga
Cunty I was34 GT them through the same lens as I see Moody's and Standard & Poor
Great advice Bill. People need to understand that their FICO is a fluid thing and can be influenced by their balances and habits, not just paying bills on time.
Thanks for the good post. It's reblogged already and I want to come back and reread it!
Bill - Ingrid (#7) is referring to the percentages you quote about the items that have impacts on a credit score. They add up to 115% (35+30+30+10+10 = 115) and it should be 100%. And, you have credit utilization listed twice - the 2nd and 3rd bullet on your list, both at 30%?
The correct percentages (according to Fair Issacs) are:
Payment History: 35%
Credit Utilization: 30%
Length of Credit History: 15%
Type of Credit Used: 10%
New Credit Opened: 10%
You should go back and correct the numbers for folks that re-blog. Good content, but errors like that reduce the value.
Here is a good resource: FICO Booklet
------------
Great info. I usually tell buyers to make sure and not make any major purchases on their credit card until after close of escrow.
While your points on how to increase your credit score are valid, I see too many people being taken in by credit repair companies when these two important parts of raising one's credit score:
are absolutely unattainable for many people who are already living paycheck to paycheck. Most people can't just make more money. Like losing weight, it takes time and effort to slowly reach your goal.
Great info, but it's not like before anymore, FICO score has become a small part when it's time to approve or not a loan. My last 2 buyers are a good example where client #1 have about 730 FICO but the deposit payment is only on the wife name while they both purchasing. They have been denied. And client #2 have about 775 FICO but relocating from another state. They have been denied as well even if they had down payment, last 2 years of sufficient revenue and more...
Jeff - Thanks for catching my mistake! I have made the correction. It should have read 15% instead of 30% on line item #3 credit utilization!
Claude there has to be something missing with these folks. If they have good credit there must be some other issue preventing them from getting a loan.
Let's just hope this next generation of college kids understand the importance of credit scores. I'm amazed how this 20-30 something generation has destroyed there credit. I really don't think they were taught how to manage money. As parents we have placed a geat deal of value on teaching our college age children the value of money and good credit.
Claude - you're welcome. Like I said, the post has great information. Also, you're right about Claude's client issues - something else is going on there. FICO scores remain important for both qualification and getting the best rates on a mortgage, but no-one with scores in the 720+ range gets declined unless there is insufficient income, insufficient assets, or the property cannot be approved (repairs, condo project, etc.). Seems strange.
Good morning Bill,
Excellent post! This is an article all buyers should read before applying for a loan. Thanks for a great presentation of the facts.
also, remember with risked based pricing, a couple of points here and there are going to effect your rate and/or costs.
there's no free ride anymore.
Bill - Wowsa ! This is packed with very informative and relevant info. Credit scores are often a mystery to people. This blog post really breaks it down in terms of how that score is reached. Great info !! ~ Chris
Bill,
This is a great ,informative blog. I knew most of the factors on how credit is determined but I didn't realize that employment and salary are not factored in. I try to teach my daughters about protecting their credit as they go out into the world.
Thanks for the info!
Marianne
Bill - Thanks for this information. It's very useful, and I'll reblog it in hopes that some of my future clients will read it.
Bill - an excellent overview of credit scores and somethng all buyers, especially first timers, should be reading. And in light of the stricter requirements, this is even more important.
I'm going to link to this from my other blog if you don't mind.
Jeff
I do not know of any legitamite lending institutions that will lend to someone with a credit score below 620. Having spent a considerable amount of my time working with families and individuals who score around and below that (found out after the fact) they just are not ready to own a home. They should rent.
Thanks Jeff! Can you do me a favor and link to my Massachusetts Real Estate news blog?
Gregory I would agree there are some people that try to buy homes that would be better off just renting for a longer period of time in order to be more financially capable.
Excellent information and worth a reblog. I hope to see a follow up from you about challenging the accuracy of credit reporting. In the past I have successfully disputed incorrect information.
This is great advice. Now more than ever those who have the best credit are able to obtain great values on homes.
Excellent information Bill. What do you know about credit card companies closing your accounts. How does that effect anything?
I have one I never used anymore, high credit line.
I kept it open for reasons you mentioned but they closed it.
Great info Bill! Thanks for posting this vital information. Many do not know what goes into a FICO score.
Missy that is a very good question. An educated guess would be that if would not effect you the same way as if you had decided to close the account on your own. It is interesting the credit card company closed it on you.
Joe, Melissa, Jennifer - Thanks for the compliments on the article. Of course if more buyers paid attention to their FICO scores they would be in a better place come the time to purchase a home.
Missy that is a very good question. An educated guess would be that if would not effect you the same way as if you had decided to close the account of your own. It is interesting the credit card company closed it on you.
Joe, Melissa, Jennifer - Thanks for the compliments on the article. Of course if more buyers paid attention to their FICO scores they would be in a better place come the time to purchase a home.
Hello Bill and Happy Easter from me up here in Seacoast Nh....thanks for the post . Hope your weekend was wonderfule.
Beautiful weather here in Hampton Beach area, warm....70's and sunny.
Patricia/Seacoast NH
Bill - thanks for posting - explains FICO very well, have post will reblog - I can explain face to face, but you write so well. :)
Jeff & Bill,
Clients 1:
The wife has never feed her credit history,having no credit card or debt. However, she had the down payment in her name only and not willing to "gift" it. She couldn't be on the mortgage and the husband alone wouldn't qualify without the down payment.
Client 2:
Husband is relocating from another state and couldn't provide a proof of job in the new state. Underwriter said: " you made money in state 1 but there is no proof you'll make money in new state 2". They had the down, the FICO, the 2 years of IRS and so on...
And, in both case, they talked to several lenders/mortgage brokers...
In the past, you needed ONE of those options to qualify :-)
Bill - You did a terrific job of laying this topic out. Very nicely done - happy Easter!
Bill - This is an excellent post and one that anyone, especially buyer's will be able to easily understand.
Great blog for anyone who is looking to buy a home in today's market.
Bill:
I remember that the first time I read this breakdown a couple of years ago I was surprised to see that interest rates on current loans was not a factor in the score.
Hi Bill -- This is a mystery to many buyers and to me as well, thanks for sharing. I've never understood why closing an unneeded credit source is bad, but such is life.
Real Estate Professionals will benefit greatly by building their business in 2010… I appreciate this post. Thanks
Azure condominiums
Getting that FICO score up and keeping it up is a challenge. sometimes things like closing a card should be a good thing but as you point out it can hurt.
Thanks everyone for all your comments on increasing a FICO score to purchase a home! Hopefully this information has been helpful!
Great Blog, love the information, not to many people who are buying a home realize what they need to do, regarding there score!
Great post Bill. This should be required reading for anyone thinking of purchasing a home. These are facts they need to know.
Bill - I like your breakdown of how the FICO score is calculated. I have this same breakdown saved on my computer for clients. I recently had a Lender run my buyers credit 7 times! Dropped her credit score 70 points! Now she has to wait until it improves in order to qualify for FHA Financing.
Chris that is crazy! Why in the world would the lender have run the credit that many times?
Awesome article, I have never seen the percentages before and found it very interesting. :)
Well done Bill, I've sent your post to my 1st time home buyers. My question is on the 10% for credit inquiries. I'm wondering how many times a credit pull would affect a score. Chris's example of his buyer has me curious.
Cindy - Thanks for the compliments. It is interesting to see how the FICO scores are determined.
Pam - My understanding is that if the credit is pulled more than a couple of times in a short period it will have a negative effect on your score.
Make sense to me, I never understood why they take away when you close accounts though but I know that is true.
The reason the credit card companies close your account is due to "lack of activity" I have had 3 CC Companies close my account because I had a zero balance for 4 yrs. If this is affecting my credit score that's a shame...
Good Post on FICO scores and how to make them better to get the loan. Thanks for the post.
There are a lot of things that surprise people about credit if you want some more information on credit scores check out this free website I found www.thecreditguy.tv