Your credit rating measures your risk of paying late or defaulting on a loan. Lenders use credit scores together with the remainder of your loan information to quantify your probability of paying back the debt on time. Credit scores allow mortgage companies to use software applications called automated underwriting systems, or AUS, to determine if the amount of risk is suitable for the loan program requested.
Credit Bureaus
The three big credit bureaus are Equifax, Experian and TransUnion. Lenders are invited to report loans and payment history to the credit bureaus on a daily basis. When employers will need to examine a possible borrower’s payment history, they purchase a credit report using the borrower’s name, address and Social Security number. Each credit agency calculates the credit rating differently. This is why the specific same information could be on all three credit reports and they all report another credit rating.
Factors which Affect Credit Scores
Several factors affect your credit rating. Making your payments on time every month is one significant element. Payments made over 30 days will lower your credit rating. Collections, judgments, tax liens, bankruptcy and foreclosure may have devastating effects on your credit rating. Each time you authorize a person to look at your credit which may decrease your credit score as well.
Raising Your Credit Score
1 misconception is that paying off credit cards will raise your credit rating. The credit bureaus want to see your capacity to manage ongoing credit without missing payments or employing the whole credit line. Pay down your credit cards so that the balances are between 30 to 45% of the total credit line. The older the credit line, the greater. Should you close a credit card, close the latest ones first and maintain the elderly ones.
Finding the Middle Score
Mortgage lenders require access to all three credit bureaus for each borrower. They use the mid-credit score. If your three scores were 780, 776 and 790 they’d use the center of the three scores, in this case 780. They wouldn’t average the scores by adding the three numbers together and dividing the sum by three.
Minimum Credit Score Requirement
Back in January 2010, the Federal Housing Authority, or FHA, began requiring a minimum 580 credit rating for any FHA loan with less than a 10 percent down payment or equity if the loan is a refinance. Conventional loans require a minimum credit score of 620. Lenders are allowed to require their own minimum credit rating requirements beyond what the mortgage investors and insurers require. Having the required score does not guarantee loan approval; it’s only 1 factor that creditors consider when approving a loan.