Jeff’s Carlsbad Blog for First Time Home Buyers

FAQs – Part 6 (Credit Scores and Credit Problems)

Posted in Mortgage info by Jeff Dowler on November 7, 2006

Why does the mortgage lender consider my credit? Is there only 1 score? What if I have a credit problem?

An important part of getting a loan is your history of credit – the credit you have now (loans, credit cards), your history of making payments (e.g., timeliness), your length of credit, and other similar factors. Your credit score (also known as a FICO Score) is an indication of how good a risk you are as a credit holder – the higher the score, the better risk you are in the bank’s eyes, in general. There are 3 major credit reporting agencies (Experian, Equifax, and Transunion), and banks and mortgage companies typically look at the credit scores from all 3. Some banks use only 1 score, but more commonly they look at all 3 and take the middle score. There also is a new scoring method called VantageScore that may become more popular and widely used than the traditional FICO scores.

If you have credit problems (which are pretty common), it could be due to errors on your report (which you have a right to get fixed but it takes time), or  because you have had a problem making payments on time, or maxed out your credit. There are ways to mend your credit, and talking with a mortgage broker can help you find out what the problems are and how to fix them. Sometimes the bank will accept letters explaining late payments (if minimal) or other minor problems. If the credit is a bigger issue, however, you will not be able to get a loan until you have demonstrated that you can manage your credit successfully.

While your credit scores are not the only thing the banks and mortgage lenders consider (they also look at your debt ratio – what percent of your monthly income is necessary to pay your credit obligations such as loans and credit cards), it is a very important part. Typically a score below 750 is considered riskier and while you can get approval you may pay a higher interest rate.


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