Download
Today I wanted to break down the enigma that is our credit score!  Many times clients are just below the score to be approved for a home and need just a little tweaking to get it to a point for approval and my hopes are that by breaking down how a credit score is determined this will help you build or repair your credit so you can purchase a home you have always wanted; and  of course the cleaner your credit the better the score and the better the rate which means a lower monthly payment and overall lower price you pay in total.  For example if you are approved for a $200,000 at 6% you will pay a total of $303,788.46 over 15 years and if you have your credit in order and are approved for a rate of 3.25% with the same terms you would pay a total of $252,960.76 for a difference of $50,827.70.  That is a substantial difference and well worth doing your best to get your credit in good shape for your home purchase.  Your FICO score is most commonly used by lenders to determine their risk factor when loaning you money.  The exact formula for determining your FICO score is a trade secret held by Fair Isaac Co. but there are a few things we do know about how your score is determined.   Your payment history is the first thing lenders will look at on your credit report and if we break its importance into a percentage, payment history would account for approximately 35% of your total score.  This does make since seeing that paying back your loan is the most important part of the transaction for the lender.  This is how they make a profit and stay in business by you paying back the loan with interest since the lender took a risk providing you the loan.   Your payment history will have record of all the good and bad history.   Some examples would be paying off a car loan or credit card, having made payments on time every month or it could be the opposite if you have been a bit reckless with your credit or hit hard times that sent your credit score down the tubes.   Keep in mind as well that your credit score is constantly changing so if your score is not where you want it today it could be a shorter time than you imagine to repair it if you put forth the effort and of course practice the self-restraint it takes when that new something comes out we think we have to have!  The next biggest piece of the pie would be the amounts you owe on your credit coming in a close second at 30% importance.  A large debt can negatively impact your credit if your income is not sufficient to balance the amount or amounts borrowed.  I have gone over in a previous post how to calculate your debt to income ratio and it is important to remember  when you get into the 40% range it becomes much harder to get any loan much less a mortgage so try and keep that on the low side before applying for a home loan.   These 2 components make up the lion share of determining your score and your focus should first be drawn to these two aspects of payment history and amount borrowed in order to have a solid foundation for your credit.  The other 3 components should not be neglected by any means but the last three components that we know of, combined make up 35% of determining your score where as payment history is that important alone.  The last three components are length of credit history making up 15% then credit mix and new credit making up 10% each.   The length of your credit history is pretty self-explanatory in that they are looking at how long your credit history runs.  If you have been using and making payments on time for 20 years with your credit this carries allot more weight than someone who has done the same for only 6 months.  The more history you have established the better because a lender has more to look at when determining their risk to lend money.  Your credit mix is the types of credit accounts listed in your history,