NEW YORK – Dec. 5, 2017 – A credit score can have a big impact on a person's ability to buy a house. A low score can put a kink in finalizing a loan agreement. Consequently, homebuyers need to know their credit scores and how to raise them before applying for a home loan.
Brad D. Yount, senior vice president and senior manager of consumer and real estate lending at CoreFirst Bank and Trust, Kelly Drummond, loan officer and military mortgage specialist at Fairway Independent Mortgage Corp., and Capitol Federal senior mortgage consultant Tim Murray provide some information about credit scores that may be helpful.
What is a credit score? What does it reflect?
Drummond: It is a numerical representation of your statistical likelihood to repay credit that is extended to you. (It reflects) your payment history, the current balances of your loans, how long you have had your credit, and what type of loans you have – installment, revolving, collections.
Why is a credit score important?
Drummond: A credit score helps determine what type of loan you are eligible for, if you are eligible for a loan and what interest rate you will receive.
Murray: Credit scores are used by lenders, credit card companies, insurance companies and even some employers as a way to assess risk based on historical performance. Interest rates, insurance premiums or even employment may be determined based on the risk level associated with the score.
If a person is looking to buy a home, what score do they need?
Yount: Most loan programs have a minimum credit score requirement. It can vary from lender to lender and from one loan program to another. There are lenders and loan programs that will grant credit with a credit score as low as 580. Generally though, an applicant needs to have a score of 640 or above to qualify for most programs.
Some government programs, such as VA (Veterans Administration) and FHA (Federal Housing Administration), will grant credit with a lower score.
How can a person raise their credit score?
Yount: The best way to raise your credit score is to pay your monthly debts on time.
Payments that are over 30 days late are reported to the credit bureau and have a significant negative impact on your score.
Also, using credit wisely will help you raise your score. This would include not taking out too many credit cards and not maxing out the cards you do have.
How can someone check their score? Is there a fee to do so?
Yount: There are a number of ways to check your credit score. Some are free, and others charge a fee or require you to sign up for a monthly service, which may include a fee, before they will provide you with a "free" score.
Others will provide you with your score monthly in exchange for your permission to market your credit information to lending partners.
You'll get your credit score every month along with product recommendations from the company.
Murray: The Fair Credit Reporting Act requires each of the nationwide credit reporting companies – Equifax, Experian and TransUnion – to provide a person with a free copy of their credit report upon request, once every 12 months. Visit annualcreditreport.com to obtain a free copy.
Yount: The (free credit) report (from the three major credit reporting repositories) will not include a credit score, but it will allow you to review all of the history of your past and present credit. It will also allow you to see who has inquired into your credit history.
The site will allow you to dispute any information you feel has been incorrectly reported.
What other things should one know about credit scores?
Drummond: Typically, it takes credit to get credit, so it is very important you actually have a score. Having high credit card balances, recent late payments, collection accounts, tax liens and bankruptcies can be damaging to your credit score.
Murray: Not all credit scores are the same. Not all creditors report to all three bureaus, which can create different credit files.
A mortgage lender is looking specifically for a FICO score from each credit reporting company and will generally use the middle score of the three for each borrower for decision making purposes (often referred to as a Tri-Merge score).
A FICO score is a type of credit score created by the Fair Isaac Corporation. More information can be found at myfico.com.
Here are some tips on how to maintain favorable credit scores:
- Monitor your credit. Order a copy of your free credit report from each of the three major bureaus annual at www.annualcreditreport.com.
- Pay all bills on time or early. A 30-day late notice on a small credit card can have a negative impact on your scores.
- Don't co-sign loans. The other person's late payments will negatively impact your credit scores.
- Don't close old revolving accounts that are no longer in use. It helps your scores when accounts are open with zero balances.
- Don't open new accounts unless necessary.
- Report fraud immediately. Contact the credit bureaus, your credit card companies, banks and the Federal Trade Commission at www.ftc.gov.Don't extend or open new credit accounts while in the mortgage application process to purchase or refinance a home.
Source: Fairway Independent Mortgage Corporation
Copyright © 2017, Topeka Capital Journal, Jan Biles