When it comes to getting a home loan, credit scores are a big deal. The next part talks about how those credit scores are made.
Home loans: Things that go into figuring out your credit score
If you want to borrow hundreds of thousands of dollars to buy a house, you will have to go through a lot of questions. Your credit history will be front and centre, with all of its flaws. We have all missed a payment at some point, so this can be a scary thought. If you miss one credit card payment, will your loan be turned down? Most likely not. There are five things that go into figuring out what your score is.
By far, the most important thing in figuring out your credit score is how you've paid your bills in the past. This will count for 35% of your overall score. When you pay your bills on time, it will help your score. The opposite will happen if you pay late. Lawsuits, judgments and tax liens are killers. Also taken into account is the size of the payment. When you're not sure, pay off your biggest debts first.
The amount you still owe on your debts is also a big part of your score. In a perfect world, you would want to have a lot of credit but not owe any money. Since we don't live in a perfect world, you should try to keep the total amount you owe to less than 30% of the total amount of credit you have. If you have $20,000 in credit available to you, you want to owe less than $6,000. This part of your credit score makes up 30% of your total score.
Your FICO score also takes into account how long you've had credit. The better your credit is, the longer you have had individual credit accounts, which are usually credit cards. You also need to show that you have actually used credit in the past. Credit is strangely worth less to lenders if it has never been used. About 15% of your score is based on how long you have had credit.
About ten percent of your FICO score is also based on the type of credit you have. Credit cards are fine, but lenders like to see more formal obligations. This can be a loan for a car, a student loan, or a mortgage from before. If you've ever had debt that wasn't from a credit card, it's very important that you made every payment on time every month.
10% of your FICO score is also based on how many times you've asked for credit. A lender is looking at all of the inquiries made over the past six months. Each one you started by applying for credit can lower your score, so don't apply for credit for at least six months before you want to buy a house.
Before you apply for a mortgage, you must order a credit report. When credit reports have a lot of mistakes, the government often gives the companies fines. In fact, as many as 50% of credit reports may have wrong information on them. Before you try to get a loan, make sure yours is clean.
