The main elements of the most common credit report and scoring factors (FICO) are as follows: Payment History (35% weight), Debt Ratio (30% weight), Credit History (15% weight), Type of Credit (10% weight), Number of Credit Inquiries (10% weight). Each of these elements will combine to have an overall effect on your ability to obtain a mortgage or refinance your home, so understanding how each works is critical in order to get the best mortgage loan or refinance possible.
The weight of each factor indicates how much that particular element contributes to your credit score. Credit scores are a significant determining factor in whether or not you will be eligible for a home loan, including a refinance.
Payment history includes all car notes, mortgages, credit card and any other type of credit that’s been extended to you. All your creditors generally report your payment patterns to the credit bureaus each month.
Your payment history lets lenders know how you pay your debts, including if you paid accounts on time or had late payments. With a 35% weight, it is the most important credit score element because it shows your resolve and ability, stability and willingness to pay your debts.
The more late payments you make, the more likely it is that your credit score will be negatively affected. This may result in queries from lenders (when trying to determine whether or not to extend credit) concerning what caused you to be late on a payment.
Also called a debt to income ratio (DTI), this is the percent arrived at by dividing your monthly debt by your monthly income. For example; if you make $5,000 per month and you have $1,500 worth of monthly debt payments, your DTI would be 30% ($1,500 divided by $5,000).
This number suggests whether you’re carrying too much debt for your income level. In most cases, the lower the number is, the better. Many lenders now want this number to be 30% or lower.
Length of Credit History
This allows lenders to get a feel for how long you have had a credit history. Among other things, this tells mortgage lenders, banks and other financial institutions if you’re responsible enough to handle credit. For example, if you haven’t obtained any credit, you might be viewed as a higher risk when it comes to debt repayment.
Type of Credit
This reports information on the type of credit you have. Is it mainly mortgage and car payments which are secured debt or is it unsecured debt like credit cards? Too much unsecured debt might raise questions in the minds of the loan underwriters – the people who are ultimately responsible for granting or denying credit.
Number of Credit Inquiries
Anytime you apply for credit, whether it’s at a local department store or for a car loan, your credit report is pulled and the query is documented in your credit file. So, when anyone pulls a credit report on you and sees that you’ve tried to obtain credit too many times over a certain period, it could have a negative impact on your credit score. It might raise concerns with your creditors about why you are seeking so much credit, or it could indicate that you’re becoming financially over-extended.
Other credit report elements include information that’s available publicly like tax liens, bankruptcies or legal judgments filed against you.
Every American is entitled to one free copy of their credit report each year. You can go to freecreditreport.com to pull your own credit report, and then contact the home finance experts at Sail Mortgage today: (724) 934-2800. You can also complete our simple online mortgage form here: http://www.sailmortgage.com/online-loan-application/.