Maximizing Credit Scoring And How It Works To Qualify For Mortgage

Maximizing Credit Scoring And How It Works To Qualify For Mortgage

This ARTICLE On Maximizing Credit Scoring And How It Works To Qualify For Mortgage Was UPDATED & Edited On March 28, 2017

Credit scoring and how it works to qualify for mortgage can be very simple. Credit Scoring by the three credit bureaus is used by lenders to determine the risk of borrowers they plan on lend.  Credit scores can fluctuate monthly and borrowers applying for mortgage should try to learn more about credit scoring and how it works so they can have the highest credit scores possible prior to applying for mortgage. The higher a borrower’s credit scores are, the less risk the lender will judge borrowers. The lower the credit scores, the higher risk factor borrowers will pose to lenders so that means that mortgage interest rates will be higher.

A consumer credit score is a three digit number rated by each of these three credit reporting agencies:

  • TransUnion
  • Experian
  • Equifax

With Credit Scoring and How It Works is that scoring ranges from a low of 350 to a high of 850. The higher one’s credit scores are, the lower the risk level the lender classifies the borrower. There are several types of credit scoring models but the most common where lenders use is the Fair Isaac & Company Inc, commonly referred to as FICO. Lenders use the FICO Model.

Credit Scoring And How It Works With Credit Scores

The way credit scoring and how it works is that consumer scores only takes into account the information reported on borrower’s profile.

The scoring model does not take into account the following:

  • Assets of borrowers
  • Income 
  • Amount of down payment
  • Race, gender, marital status, place of national origin
  • Criminal past

The scoring model takes the following into account:

  • Late payments are taken into account
  • Payment behavior
  • Current existing debt
  • Length of credit history
  • Types of credit borrower has
  • Number of hard inquiries on report

The scoring model will analyze both positive and derogatory payment patterns and comes up with a specific number. The number can change monthly and gets updated.

How Credit Bureaus Update Credit & Credit Scoring And How It Works

  • 35%  of a consumer’s overall score is from previous payment history.
  • 30% of the scoring model is from amount of balance versus limit: How much debt a consumer has.
  • 15% – Longevity of tradelines which is when they opened the account with the creditor.
  • 15% – Types of credit in consumer’s profile: A combination of installments and revolving debts is a good mix. 
  • 5%  is new credit: Number of new hard inquiries

Maximizing Scoring To Qualify For Mortgage

The key in having higher scores is to always make timely payments to creditors who report to all three credit bureaus. One late payment can drop one’s credit scores by 50 or more points and that late payment history will remain on a consumer credit report for 7 years. Most lenders will not allow any late payments after bankruptcy and/or foreclosure and one late payment for $5 dollar can be a deal killer.

Here Are Tips In Maximizing Credit Scores Prior To Applying For Mortgages:

  • Always make timely monthly payments
  • Keep revolving account debt to 10% or below the credit limit
  • Do not apply for too many creditors. Each hard inquiry will drop scores by 2 or more points and is not a good reflection and not viewed favorably by lenders
  • Never close unused cards because aged tradelines is a positive for scoring

Home buyers thinking of shopping for home and getting pre-approved should start optimizing their credit well in advance because boosting scores does take time and cannot be done overnight. I get many calls from home buyers who need to qualify for mortgage but do not yet qualify because they cannot meet the 580 FICO minimum requirement.

Here are the minimum FICO Requirements to qualify for mortgages:

  • HUD Guidelines Requires a 580 FICO for 3.5% down payment FHA Loans
  • Most VA Loan Programs require 580 FICO. There are lenders that will go below 580 FICO
  • Fannie Mae and Freddie Mac require 620 FICO on Conventional Loans
  • USDA require 580 FICO but most USDA Lenders will want 640 FICO
  • Jumbo Mortgages require 680 FICO. The Gustan Cho Team at Nationwide Mortgage & Realty LLC has Jumbo Programs down to 600 FICO
  • Condotel and Non-Warrantable Condo Loan Programs require 680 FICO

Negative Factors In Scoring

Recent changes minimize the negative effects that rate shopping can have on a mortgage applicant. If there is a consumer originated inquiry within the past 365 days from mortgage or auto related industries, these inquiries are ignored for scoring purposes for the first 30 calendar days; then, multiple inquiries within the next 14 days are counted as one. Each inquiry will still appear on the credit report. Every score is accompanied by a maximum of four reason codes. Reason codes identify the most significant reason that you did not score higher. The reason codes can help a lender describe the reasons for higher than expected rates or loan denial. Scores are not part of the credit profile and are not covered by the Fair Credit Reporting Act.

Credit Report

Credit report must contain at least one account which has been open for six months or greater, and at least one account that has been updated in the past six months for you to get a credit score. This ensures that there is enough information in your report to generate an accurate score. If you do not meet the minimum criteria for getting a score, you may need to establish a credit history prior to applying for a mortgage.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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