What types of information make up my credit score, and how will it affect me when I try to buy a home?
This is a frequently asked question among people buying a home (especially first-time buyers), so it’s worth a thorough examination in this article. In fact, the first half of this question pertains to consumers in general, because everyone can benefit from knowing the “ingredients” that make up a credit score.
Let’s begin by discussing why credit is important for home buyers in the first place. When you apply for a mortgage loan in order to pay for a home, your mortgage lender will examine your financial history from several angles.
For one thing, the lender will review your debt-to-income ratio, which is a comparison between the amount of money you make each month and the amount you owe each month (car payment, credit card bills, other loans, etc.).
And, of course, the lender will also examine your credit scores. Note that I mentioned “scores” in the plural sense. Though most people don’t realize it, you actually have three credit scores, one for each of the credit-reporting companies (Experian, TransUnion and Equifax).
How Your Score is Created
Your credit score is derived from your credit reports, using a special scoring model developed by the Fair Isaac Corporation. You’ve probably heard the acronym “FICO” before? Well that’s what it stands for … Fair Isaac Corporation.
Your history of payments on things like credit cards and car loans is a major part of your credit score. In fact, past payment history is said to account for about 35% of your overall score. If you have a history of paying bills on time, this will help your score. On the other hand, if you miss payments on a regular basis the opposite will be true.
It only makes sense why this history would be important to mortgage lenders, but it shows how you’ve performed over the years in terms of paying back loans. This is extremely relevant to somebody who is considering loaning you money!
The total amount of debt you have is another big component of your credit score. For example, if you have a lot of debt (perhaps more than you can afford to pay off), then your score will reflect this. And it probably won’t help your cause when applying for a mortgage loan.
So with this in mind, two of the best things you can do to improve your score (if it needs improving) are paying all bills on time and minimizing your debt.
Citation Note: The original version of this article was written by Brandon Cornett. Brandon is the publisher of the Home Buying Institute, which includes one of the largest libraries of mortgage advice for home buyers.