What You Should Know About Credit Scoring
The score looks at the following items:
Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit, number of inquiries. Credit scoring will place borrowers in one of three general categories.
First, a borrower with a score 680 and above may be considered an A+ loan. Borrowers falling into this category may have a good chance to obtain a lower rate of interest.
Second, a score below 680 but above 620 may indicate underwriters will take a closer look at the file in determining potential risks. Supplemental credit documentation and letters of explanation may be required before an underwriting decision is made. This scoring range may allow borrowers to obtain “A” pricing.
Third, borrowers with a score below 620 may find themselves locked out of the best loan rates and terms offered. Mortgage professionals may divert these borrowers to alternate funding sources other than FNMA and FHLMC.
Here are a few things to remember:
- Pay down all of your credit card balances to below 50% of the available credit balance or increase the limit so that the balance is 50%.
- Do not consolidate accounts on to one or two cards and close other accounts. Low balances on a few cards are better than high balances on the one or two credit cards you still have left open.
- Keep the number of credit cards you own to a conservative number, but don’t close accounts without the advice of a mortgage broker.
- Review your credit report for accuracy at least 90 days before you intend to apply for a mortgage. Have any errors corrected at that time.
Understand that paying off a collection account or judgment will not eliminate it from your credit profile. Paid or satisfied negative credit items will not disappear from your credit profile for seven years. If you currently have a collection on your credit, DO NOT pay it off until the lender requires you to.