What is a Credit Rating?
When looking to get a mortgage, the most important factor which will determine your eligibility and interest rate is your credit rating. Your credit rating can range from 300 to 850, depending on the credit scoring agency and the higher the score, the better your rating. When deciding if purchasing a home is right for you, first take a look at your credit report and rating then get pre-approved by a lending institution for a mortgage.
FICO vs. Credit Report
Your credit report is a report of your credit history and includes personal financial information like credit accounts, listing when they were opened, their current balances, credit limit and whether they were paid on time; outstanding taxes or liens against you; court judgments and any city, county, state and federal liens for unpaid taxes and bankruptcies.
Equifax, TransUnion, and Experian are the three major reporting bureaus who supply credit reports and they also provide your credit rating or score called FICO. Your FICO score is a number obtained from your credit reports and is considered the standard. Since there are three credit-reporting bureaus, you have three FICO score and 75% of mortgage lender use your FICO score to determine eligibility.
How is My FICO Score Determined?
- Payment history (35% of score)
- Amounts owed/Debt (30%)
- Length of credit history (15%)
- New credit (10%)
- Types of credit used (10%)
What qualifies as a high score?
FICO scores can range from 350-850 and the median score in the United States is 723. A good interested rate for a mortgage can be expected if you have at least a 720 FICO score. If you’re not sure if your FICO score is good or not, look at offers you receive for credit cards; If the offers are for 0% or a very low interest rate, you have a good score.
If you’re in a hurry and need a loan quickly, you can apply for a no-income-verification loan where you do not have to provide any income documentation. When going this route, the mortgage lender will want you to have a minimum FICO score of 680. If you’re purchasing a home for the first time, an FHA loan can be obtained with a 630 or higher score.
The Fair Credit Reporting Act (FCRA) expects Equifax, Experian and TransUnion to provide you with a free copy of your credit report once every 12 months. Keep in mind, they do not send these automatically and you need to request them.
FIXING YOUR CREDIT
If your FICO score or credit report don’t look too pretty, experts suggest these strategies to help fix your credit:
- Don’t max out your credit cards Lenders look at the amount of credit you have available and what percentage of it is used.
- Always pay your minimum balance on time: Although paying only the minimum will have you paying your loans off longer than paying extra each month, showing you’re consistent in making payments of at least the minimum on time looks good to lenders.
- Try to reduce balances Skip out on a night of eating out and put that extra $20 towards your credit card balance. It will help in reducing the amount you owe and will add up to help reduce your debt.
- Throw away new credit card offers Every time a credit card company runs your credit to give you an official offer, your credit score decreases It also will not look good to lenders that you all of a sudden need more credit.