By Sam Chazanow, CMB, AMP, Reverse Mortgage Specialist & Trainer, New American Mortgage

 

     Whether you are a first-time home buyer or you are planning to refinance your existing home loan, it is important to understand how your credit history influences the process. When you are being considered for a loan, the lender looks at your past payment history, the amount of credit you have outstanding and the amount of credit you have available.

     Mortgage lenders rely either on a consumer’s credit score, such as a FICO score developed by Fair, Isaacs & Company or use a combination of FICO score and other factors to price a loan. Credit bureau information is used to obtain a number that represents how likely you are to make your loan payments on time. FICO scores range from approximately 300 to 850, and in general, the higher the score, the lower the risk you are to the lender.

     Your credit history directly affects the interest rate and fees (risk based pricing) a lender charges. Consumers with the best credit generally pay the lowest amount for a home loan. Under the FACT Act amendments to the Fair Credit Reporting Act you are entitled to one free credit file disclosure, commonly referred to as credit report, in a 12 month period from AnnualCreditReport.com. This is a centralized service which was created by the three nationwide consumer credit reporting companies – Equifax, Experian and TransUnion and authorized by the government to provide free credit reports. To request your free annual report your can contact AnnualCreditReport.com. You can also call toll free at (877) FACTACT (322-8228) or send a written request to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. Credit scores can be purchased from the three major bureaus for a small fee: Equifax, Experian, and TransUnion. Building and maintaining strong scores may be as simple as improving your credit profile. Recommendations for doing so include:

• Making timely payments each month – The best way to increase a credit score is to pay bills on time.

• Paying off outstanding debt and limiting the amount of credit you use – Lowering balances on credit cards and lines, and keeping them low, raises a credit score.

• Requesting a lower credit limit on current credit cards to avoid high credit limits – High credit limits relative to income can adversely affect a score.

• Closing credit accounts limit the number of credit lines – An obligation to pay multiple accounts lowers a credit score. By consolidating debt onto two or three credit lines, preferably those with long credit histories which have been managed well and canceling other accounts, scores can be raised.

• Checking credit reports periodically – Incorrect information in a credit bureau file may lower a credit score. For information about credit disputes and credit repair, please visit the Federal Trade Commission Credit Repair Information site.

• Not applying for credit you don’t need –Whenever you apply for credit, the creditor will obtain a credit report from one or more of the three credit bureaus. Each such inquiry stays on your record and affects your score. The reason is because each inquiry suggests that you are increasing the amount of credit available to you. You may request that consumer credit reporting companies exclude your name from lists for pre-approved, unsolicited credit and insurance offers. To find out more, please call 1-888-5OPTOUT (567-8688). You can also opt-out online.

     While it may seem intimidating at first, understanding and improving your credit score is easier than you might think. The time and effort you invest can pay off handsomely in lower home loan rates, lower monthly housing payments and better loan terms.

     Call your home loan representative at New American Mortgage for more information at 757-227-3385.