Blog, Buyers

Keeping Score: Credit rating tips for home buyers.

As a rule, lenders are looking for FICO¹ scores over 650 and the best interest rates are reserved for buyers above 760. Just one 3-day-late payment can throw a score off by as much as 50 points.

Aggravating the situation, nearly 80 percent of all credit reports have errors. Consumers are responsible for finding any mistakes and disputing them with credit reporting agencies.

Credit Score Components

A buyer’s payment history compromises the biggest part of their credit score (35 percent). But it’s not the only piece of the puzzle.

The amount a consumer owes is viewed in relative, rather than absolute, terms. For example, if someone has four credit cards all approaching their credit limit, they will be viewed unfavorably compared to an “identical” consumer who owes the same amount of money, but only using 25 percent of their credit line.

This concept is termed credit utilization (CU). Specifically, CU is defined as a borrower’s outstanding balance divided by their credit limit. Typically, the algorithm is looking for a CU below 30 percent; less than 15 percent is considered ideal.

Five Common Mistakes

1. Closing old accounts.
2. Paying off old debt.
3. Opening new credit lines.

While it may be tempting to accept a retailer’s offer of free financing on the new refrigerator, washer and dryer a buyer needs for the home, they should wait until after closing day. In fact, buyers need to avoid any actions that alter their credit picture after they’ve applied for a mortgage but before the transaction has closed. Even pre-approved buyers are subject to a lender’s second review of their credit score prior to closing.

4. Assuming you know your credit score.

Each credit bureau and related credit-reporting company uses their own algorithm to establish a credit score. As a result, a consumer’s so-called soft inquiry can generate a different number than the actual FICO score a mortgage lender sees.

5. Credit line increases/decreases
6. Credit Repair Solutions

Buyer’s agents can help buyers move closer to home ownership by researching these resources and providing contact information for qualified specialists in your area.

How to stop Credit Solicitations:

Want to prevent companies from accessing information about you through credit bureaus, then soliciting you with preapproved credit or insurance offers? Go to Optoutprescreen.com

Where you can elect to opt in or out of receiving these offers.

The price of 100 points:
620 vs. 720

Based on early-2012 interest rates, a mortgage applicant with FICO score of 620 will be offered, on average, a $300,000 mortgage, the difference in total cost would be $91,080.