Saturday, June 24, 2006

Mortgages and Your Credit Score

When you apply for a mortgage loan, lenders will try to determine your credit risk, that is, the probability of you paying back the loan on time. They will take many factors into consideration when determining your credit risk. These factors may include your employment history, current income, your credit history, and of course, your FICO score.

A FICO score is a point scale ranging from a low of 300 to a maximum of 850. Your FICO score is provided to lenders by the 3 major credit bureaus: Equifax, Experian, and TransUnion. To put it quite simply, a better score means better loan options.

So what goes into your credit report that makes such an impact on your FICO score? Let’s take a look at the 3 most common items that directly affect your score.

●Trade lines, or credit accounts. These may include credit cards, auto loans, mortgages, etc., as well as your account activity dates, credit limits, balances, and payment history. Lenders will use this information in deciding loan approvals and amounts there of.

●Inquiries. Many people don’t realize that multiple and frequent inquiries can be damaging to fico scores. They take 5 points off for every inquiry. An inquiry is made anytime you authorize a lender to obtain a copy of your credit report. The credit report will contain a list of everyone who has accessed your credit report within the last 2 years. Having so many inquiries will not only lower your score, but it may give the lender an impression that you are desperate for a loan.

●Public record and collection items are perhaps the most damaging to your credit score. Listed in your credit report are any outstanding debts you owe that were sent to collection agencies, any record of lawsuits, repossessions, bankruptcies, liens, and wage attachments.

If collection items are really hurting your FICO score, an organized credit repair plan can make a major impact on bumping it up a few points or more. This can be critical in getting lower interest rates and better credit offers.


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