Mortgage Credit Scoring And How To Improve Scores

This BLOG On Mortgage Credit Scoring And How To Improve Scores Was UPDATED On July 2, 2017

Low mortgage credit scoring means higher mortgage loan costs and higher mortgage rates.

  • Home buyers who are planning on buying a home or homeowners who are planning on refinancing their home loans need to pay attention to mortgage credit scores. 
  • Optimizing mortgage credit scores can save mortgage borrowers tens of thousands of dollars.
  • Higher credit scores means lower mortgage rates. 
  • There are several factors that impacts mortgage credit scores.

Factors Affecting Mortgage Credit Scoring

The first factor that influences your mortgage credit scores are your overall payment history.

  • 35% of mortgage credit scoring is calculated on timely payments.  
  • Paying monthly debt obligations on time and having a history of paying monthly debt obligations on time will have the greatest positive impact on mortgage credit scores. 
  • Having late payments, collections, tax-liens, judgments, and charge offs will have negative impact on mortgage credit scores. 
  • As time goes by, collections and other derogatory items will have less of an impact on credit scores. 
  • Consumers with recently late on a monthly debt payment can see drop of mortgage credit scores of at least 50 points or more. 
  • Being late on a higher monthly payment will have more negative impact than being late on a lower monthly payment creditor.

Outstanding Credit Balances Affect Mortgage Credit Scoring

30% of mortgage credit scoring is from credit utilization ratio.

  • This factor is derived by the amount of credit balance divided by the credit limit. 
  • Consumers who have a $1,000 credit limit credit card and have a $990 credit balance, this will reflect negatively on mortgage credit scores. 
  • Never have a zero balance either. 
  • Always have a small balance like $10 dollars. 
  • Reason being is that credit bureaus optimize credit scores that has a factoring number.
  • Dividing the $1000 credit limit to a zero balance, will result in a zero. 
  • However, dividing $10 dollars by $1,000 yields small factoring number. 
  • The rule is that the smaller the factoring number the better. 
  • Consumers who cannot have such a small balance, then try to keep your credit balances at or below the 20% mark.

Credit History Affect Mortgage Credit Scoring

15% of mortgage credit scores is derived by credit history.

  • The credit reporting agencies takes into effect the length of time a specific credit tradeline was established. 
  • Someone who had a credit history for ten years will definitely score higher than someone who only established credit a year or two ago.

Type of Credit Affect Mortgage Credit Scoring

10% of mortgage credit scores is impacted by the type of credit consumers have on credit record.

  • The credit reporting agencies is looking for credit diversification such as having a combination of credit cards, home loans, auto loans, student loans, installment loans, and other loans. 
  • Having various types of credit will be more of a positive impact than having one type of credit such as credit cards.

Credit Inquiries Affect Mortgage Credit Scoring

10% of mortgage credit scores profile is derived by credit inquiries.

  • If a creditor does a hard pull on a consumers during a six month period, each time a credit does a hard pull, the mortgage credit scores will drop. 
  • A hard credit pull are credit inquiries from credit card companies, department store companies, installment loan companies, and other creditors.  
  • Each hard pull credit inquiry can drop credit score from 5 points to more than 30 points. 
  • It is not wise to apply for a bunch of credit cards all at once. 
  • The maximum limit on hard pull credit inquiries is 10 hard pull credit inquiries. 
  • If you applied for 10 unsecured credit cards, mortgage credit scores already took the maximum negative impact so it does not matter whether consumers have 11 or 50 hard pull inquiries. 
  • Be advised that these hard pull credit inquiries will be on credit report for some time and lenders view hard pull credit inquiries extremely unfavorably.

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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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