In this installment of the Chicago Video Home Buyers Guide, we talk about credit, and what you need to know when getting a mortgage. With mortgage guidelines tightening, having good

credit is more important now than ever before. That being said, you don’t need to have perfect credit to

get a loan. But you do need to show that if you have had credit problems in the past, these problems are behind you and you have control of your credit now.

In this video I talk about fico scores and what goes into the credit score, and what you can do to improve your credit and raise your credit score. The truth is, you have more control over your credit than you may think. Even if you have had problems in the past, you can improve your credit profile over time.

Here are links to past articles which cover how credit scores are determined, what you can do to improve your credit and how to remove mistakes on your credit report.

How to understand and improve your credit score-part1

How to understand and improve your credit score-part2

How to understand and improve your credit score-part3

How to understand and improve your credit score-part4

If I can help in any way, please let me know.

Other videos in this series -

Pre-Qualification and Mortgage Pre-Approval

Equity build up – How you build value by paying down your mortgage

How leverage and home appreciation will build value over time

The tax benefits of owning your own home

You can trust in us to get the job done right.

Free- Home Buyer’s Guide

Free Mortgage Pre-approval

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company            Chicago FHA Mortgages

“How low of a credit score can I have and still be able to get a mortgage?”

This is a question I hear almost every day. One of the frustrating things for many people trying to buy their first home, has been dealing with old credit problems. Some people consistently have problems with credit, and if you just don’t pay your bills on time (or at all) and if you don’t take credit seriously, buying a home and qualifying for a mortgage is probably not an option. But for many people their credit has been damaged due to isolated life events. Too many people have run into problems over the last few years, often as a result of losing a job, medical issues or other traumatic events. For these people, the real frustrating part is that once their lives are back on track and they are back to paying their bills on time, it is still hard to improve their credit scores. To add insult to injury, mortgage guidelines have continued tightening over the last few years. A few years ago credit scores pegged 620 as the lowest level of good credit, that is, credit scores good enough to qualify for the best rate on a conventional mortgage. Now it takes a Fico score of 740 to get the best terms, and those with scores under 700 should expect higher rates or bigger fees.

FHA is much more common sense in regards to credit. With FHA your whole credit profile is considered and the scores themselves aren’t nearly as much of a focus. FHA underwriters also base their decisions on letters of explanation telling what happened to your credit, why it happened and why it isn’t likely to happen again. FHA is much more common sense, and FHA doesn’t have a minimum credit score that they require. But over the last year almost all of the lenders who fund FHA loans have added overlays (additional requirements) that have raised the required FICO score to a minimum of 640. There might not be much difference in the credit profile between someone with a 640 score and someone with a 629 score. But statistically, credit scores under 640 are much more likely to default on their loans. The sad thing about concentrating on credit scores is that it doesn’t take the human element into effect, and there are people who have scores where the credit is improving, and others with the same scores where the credit is going down. Up until now they have all been looked at the same way if their score was below the 640 minimum. But this is now changing.

Prospect mortgage, the company I work for, has just come out with a new loan program that allows people to buy homes with Fico scores between 580 and 639. In my opinion, this is a huge step in the right direction. This isn’t a new version of sub-prime and it doesn’t mean anyone with a credit score over 580 is now able to get a loan. What it does mean is that those people who have been doing the right things and who can show they are able to afford a home payment  won’t be frozen out simply because their Fico scores came in too low. This program is going back to old school FHA underwriting. In order to qualify for this program, we need to see that even though your credit scores are lower than what is normally called for, you are handling your credit responsibly and whatever caused the problems is all past history. The real key to this loan is affordability. Having a payment that fits in your budget means you aren’t stretching too far, means less stress on your finances, so one of the biggest factors for approval will be showing that both your total mortgage payment and your mortgage payment plus all your other debt, are at comfortable levels. If your payment is going to jump with the new mortgage compared to what you have been paying for rent, we will need to see that you have been saving regularly and that the higher payment won’t be a burden.

This new program is an FHA fixed rate mortgage. Here are some of the features of this new loan:

• Borrowers credit scores between 580-639.

• Available for purchase loans only.

• 3.5% down payment.

• All the funds for closing can come from a gift.

• Available for single family homes, townhomes, condos and 2 unit buildings (rental income can’t be used to qualify).

• Ratios (this is to show affordability) are 31% of income cam be used for the housing payment and 43% of income can go toward the housing payment plus all other debt. These ratios can be increased if there are at leas 2 compensating factors.

• Can apply 2 years after a chapter 7 bankruptcy discharge – 12 months after chapter 13.

• 2 months reserves required (based on 2 times the full mortgage payment).

• Home buyer counseling is required.

The rates on this program are higher than for conventional FHA mortgages because of the higher risk. This program won’t help everyone, but it will help a lot of people buy a home now. If you are looking to buy a home but worried that your credit will hold you back (or a Realtor working with clients who have had problems in the past), give me a call.

Free Home Buyers Guide

You can trust in us to get the job done right.

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company            Chicago FHA Mortgages

FHA credit score requirements are moving up again. We, and most other lenders, now have moved to a minimum 640 middle score for FHA approval, and some wholesale lenders now require a minimum of 660. If you read the FHA guidelines, the minimum score is only 580 (though there is no way you will get a loan with that score), and with the economy soft and the housing market down, cutting off otherwise well qualified buyers doesn’t seem like a good way to achieve their goal of offering more families a chance to buy a home of their own. So what gives?

The problem is that this tightening of credit standards is a direct result of FHA success (I’ll get into this more in a minute). As anyone who reads this blog regularly knows, I am a big fan of FHA mortgages. FHA has always offered common sense, fully documented loans to middle class and low income borrowers. FHA is often thought of as a first time home buyers loan because you only need a small 3.5% down payment and their philosophy on credit was more realistic in that they were willing to work with people who had mistakes in the past.  The key with FHA credit issues is that they needed to understand the situation – what caused the problems, that the borrower is back on track and that the credit problems aren’t likely to continue. FHA was never a score based loan, it was a loan that looked at each situation individually. As someone who reads and analyzes credit reports every day, I can tell you the credit score is just a starting point. For example, 2 of the credit reports I looked at this week from different borrowers had almost identical scores, both in the low 600s. One was a single parent who went through a divorce and had some uninsured medical issues which stained her credit, but is now paying everything on time and trying to rebuild her good credit. The other was from a single guy who makes a great income but travels regularly and doesn’t have a system to pay his bills on time. He can afford to pay when the bills come due, but hasn’t gotten in the habit of doing it. To me these people, even with the same scores, should be looked at differently.

Up until a few years ago FHA never had a minimum score requirement. The score requirements are now coming from the lenders who take on the FHA loans (FHA doesn’t make loans themselves, they insure the loans that meet their requirements) and again, they are raising the scores because of the program’s success. A few years ago, before the financial melt down, FHA accounted for about 2% of the loans originated. 100% financing and sub-prime loans had taken away most of the borrowers who would normally be FHA buyers. Now, most of the companies making these riskier loans have gone out of business or been bailed out by the government, and FHA market share is in the 30 to 40% range. As conventional mortgage guidelines have gotten tougher, more borrowers who would have otherwise been conventional buyers are now better served by FHA. One result of this is that the average credit scores for FHA loans has increased a lot over the last years, from the low 600s to near 700.

But with their market share increasing so dramatically, this has also put pressure on the FHA reserve fund. FHA insures against losses by collecting mortgage insurance premiums on every loan they insure. This has been enough to keep the program solvent since its inception back in the 1930s, but with unemployment high and home values decreasing, this has increased loan defaults and decreased their reserve fund. Although Fannie Mae and Freddie Mac and all the big banks have had to go to Uncle Sam to keep their doors open, FHA is doing this on their own. In order to protect their fund, they have taken several big steps. Earlier this month they changed the way they collect mortgage insurance in a way that will build funds quicker. They also have put more pressure on lenders who make the FHA loans, shifting more risk from FHA to the lenders, and this has spurred the increase in score requirements.

The lenders who approve and fund the loans have always been responsible for making sure that the loans conform to FHA guidelines, they are now being held to a higher standard. Now the lenders are also held accountable for the default rate, or the percentage of loans that go into default (missed payments up to foreclosure). This means that FHA could force a lender to buy back loans that go south, even if the loan met all the guidelines and everything was done according to the rules. The truth is that you never know for sure what loans will go bad, because so many of the problems arise when an unforeseen life event happens to a borrower. It doesn’t matter what your credit score is, if you lose your job, have a death in the family, a medical emergency or another traumatic life event, your finances will be under stress.

From the lenders standpoint, the worst thing that can happen is being forced to buy back a loan. Lenders make money by originating loans and then selling them off and collecting their profit upfront. When they are forced to buy back a loan, this is a big loss. Since lenders aren’t in the habit of doing anything that will cost them money, raising the credit scores is a logical way to cut the risk in their portfolio. This isn’t what FHA was hoping for, though. This move by FHA to hold lenders accountable, is having the unintended consequence of making it harder to qualify for those who FHA is meant to serve, and by taking otherwise well qualified buyers out of the housing market it is making it harder to build a housing rebound. FHA Commissioner David Stevens recently said that he though some lenders had gone overboard on the credit tightening, and "You won’t help communities recover if you limit lending to just the top tier borrowers." But without specific action from FHA the lenders are going to continue with a tighter credit policy, because this is the safest course for them.

What this means to new home buyers or anyone thinking about getting FHA financing.

Credit is now more important than ever. If you are thinking about buying a home, the best thing you can do is to start the process early, have your credit run and get pre-approved for a mortgage. Sometimes there are problems on your credit report which you may not even be aware of. If you start early you have time to make sure you address the issues and get mistakes cleaned up, before it’s too late.

Here are links to past articles which cover how credit scores are determined, what you can do to improve your credit and how to remove mistakes on your credit report.

How to understand and improve your credit score-part1

How to understand and improve your credit score-part2

How to understand and improve your credit score-part3

How to understand and improve your credit score-part4

Free Home Buyer’s Guide

No-Obligation Mortgage Pre-approval

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company            Chicago FHA Mortgages

Chicago, Illinois – One of the major differences between FHA loans and conventional loans is how the loans are approved. Conventional loans are almost entirely dependent on the automated approval, that is as long as you put the right information into the computer (Getting the information right is one of the jobs of a good mortgage broker or mortgage banker) and provide the matching documentation, the automated decision will stand. FHA is different. With FHA there are two ways to get your loan approved, through the automated decision, or with an FHA manual underwrite. FHA is also different in that any credit issues that show on your credit report (especially over the last 2 years) will need to be explained. If you already have an automated approval, this is more of a matter of dotting the I’s and crossing the T’s. If you can’t get your FHA loan approved automatically, your credit letter may make the difference in whether or not your loan is approved.

First of all, if you’ve had serious credit problems you need to ask yourself if you really are ready to buy a home. This can be a hard question to answer, but if you have been struggling to pay your bills on time, buying a house is probably not the right decision for you. At the same time, I’ve seen many cases where the borrowers were good credit risks who for one reason or another had a situation that made it hard to pay their bills on time. This is especially true when the problems were caused by circumstances beyond their control, like a job loss or medical emergency. If you are looking to buy make sure you are back on your feet and your finances are under control. Another thing to look for is to see if the problems on your credit report are correct. If there are mistakes on your report and you can show that they are mistakes, you can get the report cleaned up before it is submitted to underwriting.

An FHA letter of explanation is used to explain exactly what happened and to give the underwriter a reason why she (or he) should approve the loan in spite of all the reasons she has to deny it. In other words, this is your opportunity to make your own case for why you are a good credit risk even though you show some credit problems and your scores may be low. Bad things happen to good people. There is a big difference between someone who runs into tough circumstances and has a hard time taking care of their obligations for a while, and someone who just doesn’t bother to pay their bills or who takes on credit without figuring out how they will make the payments. The credit letter of explanation allows you to say in your own words why this was a temporary blip and that you are now ready to take on more credit.

So what are underwriters looking for in your FHA credit letter? In a nutshell, they are looking for 3 things.

1. The problems were a one time event, not a regular pattern. This is especially true if you can show that this happened due to circumstances beyond your control.
2. What did you do when faced with this difficulty? The key here is to explain what you did to get yourself back on track. Have you paid off the debts? Are you on a payment plan? You need to show that the credit problems have now been dealt with and are not a current concern.
3. Why won’t this be a problem in the future? The underwriter is putting her credibility on the line when she approves a loan manually. You need to be able to show what has changed so the problems won’t happen again. Has your income increased? Are your expenses lower now? What in your life has changed for the better that will give the underwriter confidence that she is not making a mistake in approving your loan?

There are a few things to keep in mind when writing your letter:

Authenticity, be yourself. This isn’t an English paper and won’t be graded on spelling or punctuation. Explain what happened just as if you were talking with the underwriter face to face. Don’t try and shorten the explanation. Take as much time as you need to get the story right.

Document everything. If you have a good story to tell, you will also need to show proof to make your case.

So what happens if you don’t fit these guidelines? Most situations fit under the automated approval, even situations which show some rough credit. So if you have some good compensating factors you may be in a better position than you think. But in many cases the best thing you can do is use this as motivation to get your credit back in order and be ready to buy a home down the road.

Here is a series of posts I wrote on how to clean up your credit and increase your credit scores:

How to understand and make the most of your credit score part 1

How to understand and make the most of your credit score – part2

How to understand and make the most of your credit scores -part 3

How to understand and make the most of your credit scores – part 4

Illinois Mortgage Rates and News

Good credit is crucial to buying a home and being approved for a mortgage. Knowing how credit works and being able to use it effectively is a necessity in today’s real estate market. This is the fourth and final installment of the series. Here are the previous installments:

How To Understand and Make the Most of Your Credit –Part 1 – An overview of credit.

How To Understand and Make the Most of Your Credit –Part 2 – What makes up your Fico score.

 

How To Understand and Make the Most of Your Credit –Part 3 – 10 Ways to raise your Fico scores.

 

This installment will cover what you can do if you have mistakes and problems on your report.

Fixing Mistakes on Your Credit Report and Rebuilding Your Credit

So what happens if you have mistakes or problems on your credit report? Your situation depends on how serious the problems were, and how long ago they occurred. If the problem was from years back you might be surprised at what we can do. Recent credit is much more important than older issues. But even if the problems are more current, there are still options.

Most of the sub-prime loans have disappeared, but depending on your situation and what compensating factors you can show, you may be in better shape than you may think. FHA, a government program, is more lenient of past credit mistakes, and can be a great option for many borrowers. The key here is to be able to show that the circumstances that got you in trouble have changed, and you are now able to use credit responsibly. Many people think that after a bankruptcy, for example, they won’t be able to buy a home again for years if at all. But depending on the causes, you may be able to buy, at good rates, as soon as a year or two after the discharge once you have reestablished your credit. It also depends on your specific circumstances. The best thing you can do is talk with a qualified loan officer and have them review your credit and your goals.             

Another option is to take steps to clean up your credit report. Mistakes on credit reports are surprisingly common. (On my own credit report I’ve had mortgages listed on properties I’ve never owned, and a collection account for someone with my same name who lived in another state.)  Because of this a process has been put in place for consumers to dispute incorrect items on their credit report and have them removed.

As a first step, you need to get a copy of your credit report and decide which items you want to contest. Next write the credit repository (Trans Union, Equifax or Experian – this can all be done on their websites). Explain that the information is incorrect and that they need to investigate the information and remove it from your report. If you have any documentation to help your case, include the documentation, but you are not required to show proof. Once the credit repository gets this, they are required to investigate it within a reasonable amount of time (30days), and if they can’t prove that the information is correct, they have to remove it from your report.

To investigate the disputed item, the repositories send a form to your original creditor asking for further information. At this point a 3 things can happen:

1. If the creditor fills out the form and sends it back stating that the information is correct, the credit repository will reject your dispute, and the item will remain on your report.
2. If they agree with you that the item is incorrect, it will obviously be removed.
3. In many cases the creditor simply doesn’t respond. If they don’t respond by sending the form back within the 30 day time period the credit repository is required by law to remove this item from your credit report. They are also required to notify the other repositories that the item is incorrect and they too are required to delete it from their files.

It’s possible to clean up problem spots on your credit using this approach, but you will need to be disciplined about following through, and it may take several attempts before you see any progress. It is also common for an item to be removed, and then show up again later, so you need to monitor your credit on a regular basis.

You’ve probably seen ads for companies that claim they can fix bad credit. These companies use this same method but most charge huge up-front fees, and if you don’t know who you’re dealing with, you could spend a lot of money and end up with no change in your credit.

If you have had credit problems, the best thing you can do is to first bring all your debts current and make sure you continue to pay your bills on time. Taking action to fix mistakes will help you raise your credit score and help you to qualify for a mortgage.

Illinois Mortgage Rates and News

Chicago, IL – The first installment of this series, How to Understand and Make the Most Of Your Credit Scores , gave an overview of how credit works and how your credit affects your ability to qualify for a mortgage. The second installment  covered Fico scores, one of the biggest factors in qualifying for a loan. This installment will go over some tips on how to manage your credit and raise your overall scores.

Your Fico score is broken down into 5 major categories, and each of these has up to 100 different factors that make up your over all credit score. To make it more confusing, the actual formula that goes into the credit scoring system is a trade secret, and it changes regularly based on loan performance. With all the changes in the mortgage market you can be sure that it is being tweaked regularly, and tightening up in ways we don’t know about yet.

There have been all sorts of schemes for raising your Fico scores. Some were barely legal but widely used. One of these was the practice of being put on someone else’s credit card as an authorized user – in effect, borrowing their good credit to raise your score. There were people who made thousands of dollars per month by allowing people with poor credit to use their credit history (but not letting them actually use the credit cards). It took a while, but Fico figured out this scheme and it no longer works.

Still, there are some ways you can use your credit that are proven to increase your Fico score and build a better credit rating.

 Top 10 Ways You Can Use Credit effectively and Raise Your Fico Score:

1. 1. This probably goes without saying, but the biggest thing you can do to improve your credit is to pay your bills on time. If you’ve have had problems, you need to get your accounts current and keep them current. Recent history matters most, so time will work wonders toward improving your Fico score and credit profile.
2. 2. Monitor each of your accounts, and make sure you keep your credit card balances well below your credit limit. Your Fico score will improve if you drop your balance below 50% of your max credit limit, and it will improve again when you are below 30%. If you are over your credit limit it can kill your score because not only do you have a high balance, but you are now in technical default.
3. If you have mistakes or inaccuracies in your report, dispute them. You can work with your creditor and try to get them to fix what they are reporting, or you can go directly to the repositories and contest the items with them. (I’ll cover how to do this later.)
4. Credit scoring systems want to see that you use credit regularly, but use it wisely. You will get more value for using credit cards monthly and paying them off at the end of the month then you will if you have credit lines which you never touch.
5. Closing unused credit cards won’t increase your score. If you are planning on taking out a mortgage soon, and you want the most benefit, keep those old lines open.  In the short term closing accounts takes away their history and reduces your total available credit limit and it can actually make your score drop. (On the other hand, closing accounts might make a lot of sense from a security and financial planning standpoint. But don’t do it if you are planning to apply for a loan soon.)
6. Don’t accept pre-approved offers you get in the mail. If you are like me, you could fill a recycling bin with letters from lenders saying you have been pre-approved for financing. They say you are pre-approved, but if you apply the first thing they will do is run your credit report.
7. Only apply for new credit when you actually need it, and you know you can afford it. Requesting new credit (inquiries) will lower your Fico score more if your credit isn’t so hot to start with than it will if your credit is stellar.
8. Make sure you don’t open a lot of accounts too quickly. New accounts will lower your average account age, and this can hurt your score.
9. If you’ve had a bankruptcy or credit problems in the past, you will need to re-establish your credit history. You may need to start with a pledged account, that is, a credit line with a credit limit fixed to the amount you have on deposit with the bank. Over time you will be able to get more credit offers. It can be hard to reestablish credit, but opening new accounts and paying them off on time will help you in the long term.
10. If you have old collection accounts on your report, don’t pay them off until you consult with your loan officer. If a collection is old it may not be a big factor in your score. When you pay it off it shows new activity on that bad account and can lower your score temporarily. The underwriter may require that you pay off the collection before closing, but doing it then will not affect your approval.

The key to good credit is to not take on more debt than you can handle. Being aware of your credit use and making sure you use credit responsibly goes a long way toward increasing your Fico scores and putting yourself in a great position. But what happens if you have mistakes in your past that are holding you back now? We will cover that in the next post.

The other parts of this series are:

How To Understand and Make the Most of Your Credit –Part 1 – An overview of credit.

How To Understand and Make the Most of Your Credit –Part 2 – What makes up your Fico score.

How To Understand and Make the Most of Your Credit – Part 4 – Fixing Mistakes and Credit Repair

Illinois Mortgage Rates and News

Technorati Tags: credit scores,Fico scores,Improve your credit,mortgage,Illinois mortgage rates ]]> http://www.ptmortgage.com/blog/2007/12/12/how-to-understand-and-make-the-most-of-your-credit-scores-part-3-ten-ways-to-raise-your-fico-scores/feed/ 4 http://www.ptmortgage.com/blog/2007/12/10/how-to-understand-and-make-the-most-of-your-credit-score-2/ http://www.ptmortgage.com/blog/2007/12/10/how-to-understand-and-make-the-most-of-your-credit-score-2/#comments Tue, 11 Dec 2007 05:09:31 +0000 Peter Thompson http://www.ptmortgage.com/blog/2007/12/10/how-to-understand-and-make-the-most-of-your-credit-score-2/

Chicago, IL – The first installment of this series,  How to Understand and Make the Most of Your Credit Score – 1,  gave an overview of the credit system, and how good credit is more important than ever before for qualifying for a loan and getting the best interest rate. This installment we will go over Fico scores, one of the biggest factors in qualifying for a loan.

Your credit report contains a good deal of information but most lenders focus on one feature, the FICO score. The name FICO is short for Fair Isaac Company, the firm that developed it. Actually, there are 3 FICO scores, one from each repository, but we generally use the middle score. This score is a computer model that weighs the overall risk in your credit profile. The idea behind credit scoring is to measure the likelihood of a customer’s defaulting on a loan.

Credit scoring goes a long way toward taking the human out of the approval process and making the system more automatic. There are some big advantages to this. Because of credit scoring you can go to the local mall, apply for a credit card and automatically be approved for financing. It works the same way with mortgages. This is how we can offer same day full pre-approvals.

Fico scores range from a low of 350 to a high of 850 (the higher the better), but it’s rare to see scores at either extreme. Most people’s scores are in the 600s and 700s. Mortgage approval depends on other factors besides credit, but a high credit score will go a long way toward helping your situation. With risk based scoring you will need a score over 680 to get the best rates and pricing. If you are in the low to middle 600 range there are still options. If your credit score is below 620, you will have a harder time getting approved and the interest rate will be higher. The options available for those with scores below 600 are slim. Not so long ago Sub-prime mortgages filled this niche. Now your best option is to work on improving your score early.

Because your credit score is so critical to qualifying, it is important to check your credit early in the process, before you’re ready to even start looking for a home. This way if there are mistakes or problems, you have time to work on the credit and improve your scores.

There are five major factors that make up your credit score. These major factors are broken down into hundreds sub-factors, and how you measure up against all these factors is boiled down into your score. One thing to be aware of is that formula for the scoring changes regularly. This is meant as a way to measure the risk of default, so if new risk items show up in their reports, you can bet that the scoring will change. Lately I’ve seen scores vary more than usual, so my guess is they are adjusting the formula at the same time they are tightening the underwriting.

Here are the 5 factors, listed in order of importance:

Payment History: 35% impact. This seems obvious, but if you pay your bills on time it helps your score. Late payments, judgments and charge-offs can kill your score. If you miss a large payment it will hurt your score more than if you miss a low payment. Late payments from the last 2 years are more of a problem than older delinquencies.

Outstanding Credit Balances: 30% impact. This is a surprise for many people. You can have a perfect credit history and still have a poor score if your balances are too high. What they’re looking for here is how many accounts do you have open, and how high the balances are on the accounts. If you owe a lot of money on a lot of accounts, this is a risk that, in the future, you’re more likely to make your payments late, or not at all.

Your outstanding balance compared to your available credit limit is the issue here. If you are near your max credit limit it hurts your score. If you go over the max limit your score will take a big dive, because now not only is your balance too high, but you are now considered in default of the loan.

The less available credit you use the better. It helps your score if you spread your debt around several cards. Your score improves if you drop your balance below 50% of your limit, and it is best if you use no more than 30% of your available credit limit.

Credit History: 15% impact. How long have you had credit established? How long has it each account been established? And how long has it been since you’ve used the credit line? If you have a long history this will help your score.

Type of Credit: 10% impact. You lose points if you have nothing but credit cards. A mix of auto loans, credit cards, and a mortgage is ideal.

Inquiries: 10% impact. Every time you apply for credit it shows as an inquiry in the credit repository. Inquiries can lower your score because applying for more credit means you may be taking on new debt.

The credit report shows the number of inquiries that have been made on your credit history within the last twelve months. Each inquiry can cost as little as 2 points, and as many as 50 points against your score. If your credit score is high, the inquiry won’t affect you much at all. But if your credit score is lower, new credit is looked at as a big problem, and can bring your score down by as much as 50 points.

Also, if you’re about to buy a car or apply for a mortgage and have your credit run several times, make sure you do it all at once. It only counts as one inquiry if they’re all done in a 14 day period.

These scores are calculated by a computer that’s not taking any personal factors into consideration. When a credit report is generated, it’s simply a snapshot of your credit profile for that particular moment in time. Scores change, sometimes by large amounts in a short period of time. To make sure you don’t have a problem when you’re ready to buy, it’s important to have a loan officer review your credit and make sure you are on the right track.

I’ll have more tips on how to best use your credit in the next installment here at Illinois mortgage rates and news.

Here are the other installments in this series:

Part 1 – How our Credit System Works

Part 3 – 10 Ways to Raise Your Fico Scores and Improve Your Credit

Part 4 – Fixing Mistakes and Cleaning Your Credit Report

Illinois Mortgage Rates and News

Technorati Tags: credit reports,credit scoring,how to improve your credit,Illinois mortgage rates ]]> http://www.ptmortgage.com/blog/2007/12/10/how-to-understand-and-make-the-most-of-your-credit-score-2/feed/ 7 http://www.ptmortgage.com/blog/2007/12/09/how-to-understand-and-make-the-most-of-your-credit-score-part1/ http://www.ptmortgage.com/blog/2007/12/09/how-to-understand-and-make-the-most-of-your-credit-score-part1/#comments Mon, 10 Dec 2007 03:15:30 +0000 Peter Thompson http://www.ptmortgage.com/blog/2007/12/09/how-to-understand-and-make-the-most-of-your-credit-score-part1/

Chicago, IL – Your credit profile has always been a big factor in qualifying for a loan, but with loan quality problems in the mortgage industry the underwriting is becoming increasingly tight. One recent change is Fannie Mae and Freddie Mac’s move to risk based pricing. This means those with credit scores that used to be considered good but not outstanding will need to pay more for their mortgage. The private mortgage insurance companies have taken on similar policies. These changes mean that good credit is more important than ever before for both qualifying for a mortgage, and getting a mortgage for the lowest rate and cost.

Part of my mission here at Illinois Mortgage Rates and News is consumer education. Credit can be a confusing topic. Most people think that all they need to do is pay their bills on time. But good credit is much more than that. In order to understand and improve your credit profile you need to know how the credit system works and how to use it to your advantage. This is a big topic, so I’m going to break this topic up into several posts. I will cover how the credit system works, how banks and mortgage companies look at your credit, what goes into your FICO scores and how to fix mistakes and problems in your credit rating.

It’s hard to function in America without good credit. Good credit is not just about buying things, either. Have you applied for a new job lately? Many employers are now running applicant’s credit before hiring. Auto and home insurance rates are tied to credit scores, too. But if you want to get a mortgage at the best terms, good credit is crucial.

That doesn’t mean you’re out of luck if you have a few late payments on your record. Your overall credit pattern is the key, not just isolated incidents. And even if you have had serious problems in the past, there are still ways you can buy.

Your credit record is compiled by 3 companies, Equifax, Experian and Trans Union. These companies are called credit repositories. Their business is to gather information from financial institutions and businesses throughout the country and then sell this compiled information back to the retailers and banks so they can use it as a basis for their credit decisions. Each repository does this independently of the others, so your credit profile and scores will be slightly different with each. If you are applying for credit at Home Depot or Best Buy, they will usually only pull from one repository. When we run a mortgage credit report we pull a tri-merged report which draws from all 3 credit repositories.

Your credit report is a record of all the credit you’ve built up over your lifetime. (Is this the real permanent record your teachers warned you about back in school?) Your credit report gives a list of all the accounts you have now, as well as all the accounts you have closed. It shows the balance of each account, the credit limit, your payment history showing late payments as 30, 60, 90 or over 90 days late, and any past due balance you still owe, when the account was opened and when it last showed activity. It also shows a record of bankruptcies, judgments, and foreclosures you may have had.

Back in 1992 when I first got into the mortgage business, all this credit information was underwritten manually by a mortgage underwriter. The underwriter would base their loan decision on how well the borrower conformed to established credit guidelines. There were guidelines, but it came down to a judgment call on the level of risk the loan carried, and some underwriter’s would accept more risk than others.

The underwriter still reviews the credit, but much of the decision is now based more on credit scores and automated underwriting decisions. Still, it is all about risk. In the next installment I will talk about credit scoring and FICO scores, how they measure risk and what you can do to show yourself in the best light.

If you are even thinking about getting a loan, the first thing you need do is get a copy of your credit report and see what it has to say. I will go over this in depth later, but if you want to see your credit on your own, there are a couple of ways to get a copy of your report. By law, each repository has to give you a free copy of your credit report once each year. You can get the reports at annualcreditreport.com. These reports will give you all the data of the report, but they won’t give you the credit score. To get the scores you will need to pay. You can also order a copy of each from the repository websites, or you can get them all for a fee at Myfico.com.

In the next post here at Illinois Mortgage Rates and News, I will cover more on credit scoring and what goes into the FICO score.

Here are the other installments in this series:

Part 2 – Fico Scores and How They Work

Part 3 – 10 Ways to Raise Your Fico Scores and Improve Your Credit

Part 4 – Fixing Mistakes and Cleaning Your Credit Report

Illinois Mortgage Rates and News

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