Credit 101:
Good credit is an important part of the equation in getting a home loan.
Here are the factors that go into a credit score:
1. A credit score is a number that reflects the historical information on a credit report. The number indicates a person's likelihood of becoming deliquent on a loan in the future. The higher the score, the better the terms of the loan such as a lower interest rate.
2. Review your credit report before shopping for a mortgage. You can get a free credit report every year at www.annualcreditreport.com.
3. Errors on a credit score can be fixed. We encourage our clients to get credit counseling for better understand their credit report. To find a HUD approved housing counselor, call 1-800-569-4287.
4. Ordering a credit report will NOT negatively affect your credit score. What does have a major impact is payment history and amount of debt. The longer the credit history, the higher your credit rating, so it's not good to close an unused credit card.
5. A good way to lower your credit score is to reduce debt. Lenders look at a total debt load of no more than 36% of income including house payment.
It's a good idea to get installment debt (car loans, student loans, credit cards) down below 20% of total income.
6. The FICO credit score ranges from 300 to 850, and a higher score can yield a lower interest rate. The FICO credit score is calculated based on five categories:
- Payment History 35%
- Amount owed 30%
- Length of credit history 15%
- New credit 10%
- Types of credit used 10%
