Credit scoring was developed in the 1960s as a means to determine whether or not consumers were likely to repay their loans. The score ranges from 350 to 850 with a higher score being extremely favorable. Essentially, a high credit score translates into lower interest rates for the borrower.
There are five factors that comprise the credit score.
- Payment history accounts for 35% of the score
- Outstanding credit balances (amounts owed) have a 30% impact
- Credit history makes up 15%
- Type of credit factors at 10%
- Inquiries for new credit influence the score by 10%
This gives the lender a snapshot of an individual’s sense of financial responsibility and ability to pay back loans.
Interestingly, California has among the highest credit scores in the country. If you have a strong FICO score, this is a great time to purchase a home. Rates are at such lows, your monthly mortgage payment will cost less than renting.
For most lenders, you need a minimum credit score of 620-660 depending on the circumstances and underwriting guidelines of the loan. There are loans available for those with scores between 500 and 640, but they are more difficult to find and often have strict guidelines in terms of the other requirements. High credit score loans (those above 700) are ideal, as it suggests very low risk to the lender.
The best thing you can do if you are looking to purchase a home is to maintain the highest credit score you can. If you currently have a credit score that is less than ideal, focus on the opportunity to improve it. What can you adjust in your lifestyle to show banks that you are a reliable candidate who will pay back the money you borrow?
A great place to start is by paying off your credit card bills each month. Don’t just make the minimum payment and always pay on time. Do not have multiple credit cards that you pay off with other cards, and do not spend money on things you cannot afford. Think about expenses you have that might be unnecessary and find ways to cut them out of your budget.
There are many ways to improve your credit score. Our Mortgage Advisors can provide you with more detailed information on the subject, including our Guide to Better Credit book. We can also introduce borrowers with challenged credit to a reliable resource for credit remediation.
If a borrower has to pay a higher interest rate to close a loan, the tarnished credit rating will begin to improve once mortgage payments are made on time and in full. In this case, we will set up a watch to alert the borrower when an opportunity arises to refinance and get a lower interest rate.
Let us know how we can help you:
- Pull your credit and find out your FICO score
- Improve your credit score
- Lock in the best mortgage rates
- Speak with a Mortgage Advisor for one-on-one advice