The credit score is a tool mortgage lenders and other financial institutions use in determining the financial health of a prospective homebuyer.
The credit score, such as the FICO score is a financial term, and is important when mortgage lenders are pre-approving you and pricing the interest rate for your new mortgage loan. A FICO score which is short for Fair Isaac & Co, is one of three credit scores mortgage lenders use. A credit score is a snap shot of your credit report on a specific date and time. Your credit score measures your ability to pay your debts in a timely manner.
In most cases applicants with a higher credit scores are considered better risks and receive better interest rates while individuals with lower credit scores may receive a slightly higher interest mortgage.
Credit Scores and Mortgage Rates
Most credit scores range from 300-850. For example, a credit score of 760 and above indicates a better credit worthiness than a credit score of 679 which suggests the loan may be a little risky and may command a higher interest rate.
Factors Affecting Credit Scores
Your credit score is based on a credit report compiled by one of three licensed credit bureaus in the United States Experian, TransUnion and Equifax called a Residential Credit Report. Due to the differing reports provided by these credit bureaus, one person may have three completely different credit scores.
Although the model used in determining your credit score from your credit report is not made public, Fair Isaac and Company have listed the following factors as having the most bearing on the generation of your credit score:
A history of late payments, bankruptcy, foreclosures and other negative actions lead to lower credit scores.
High Credit Balances to Credit Limits
Credit scores consider your existing debt and the available balance in your accounts. In most cases your credit score will be affective if you carry balances on your credit cards or 30% of the high balance limit.
Length of Credit History
How long your accounts have been created is accounted for when generating a credit score. This factor rewards an account with a proven history of sustained credit.
Type of Credit
A diversification of different accounts of credit is sometimes rewarded. People who have lines of credit in different types of accounts such as credit cards, retail store cards, consumer finance and mortgage may be a benefit to their credit scores.
Recent Credit Requests
Multiple requests for credit in a short period of time (90 to 120 days) may be considered a risk and thus reduce your credit scores.
In short, your credit report and credit scores serve as representation of what your credit worthiness is to mortgage lenders. Please let me know if you have any additional questions regarding credit scores.