Credit is a leading factor that lenders consider before approving you for a mortgage loan. It is important to understand your credit score, where you get your credit score, how your credit score is made up and what to expect from your credit score when applying for a home loan.
 
What are credit bureaus, credit reports and credit scores?

In the United States, there are three credit bureaus (Experian, Equifax and TransUnion), also called credit reporting agencies, which maintain credit history files on individuals. Each bureau is structured differently but each credit report contains bill payment history, current debt, loans and other financial information. From these credit reports, a numeric value called a credit score is calculated showing your credit worthiness at any given point in time. In addition to multiple credit reports, there are also many credit scores, each calculated using different formulas or models, so you don’t have one universal credit score. However, the good news is there are common factors that impact your credit scores.
 
What factors do not impact credit score?
 
Factors such as marital status, age, race, color, religion, national origin or where you live, do not impact your credit score. Income and occupation do not factor into credit score, but will be considered by a lender for consideration of a mortgage loan. Your credit score will also be included in the decision on what rate you are offered on your mortgage loan.
 
What factors DO impact credit scores? 
 
Most credit score models have ranges between 300 and 850 and the higher score is more favorable. Below are important areas that influence your credit score:
 
Payment history – Includes your payment history on accounts contained in your credit report, including how many late payments you made and how long payments were late.
 
Amounts owed – Considers how much you currently owe to creditors. Looks at your credit utilization ratio: how much you owe compared to how much credit you have available to you through credit cards or lines of credit.  The lower the amount owed or the lower the utilization rate, the better.
 
Length of credit history – Looks at how long you have been using credit, the average age of your credit accounts and your oldest account.
 
New credit – Credit scores consider how many new credit accounts you have recently added. People who have just opened multiple credit cards or added more debts are a bigger risk than someone who has no new accounts.
 
Hard inquiries – There are two types of inquiries companies make into your credit: hard inquiries and soft inquiries. Having too many hard inquiries in a short time period can have dramatic negative effects on your credit score while soft inquiries have no impact.
 
Types of credit used – The variety of installment loans and revolving credit accounts you have, or “credit mix,” also plays a role in your credit score. A diverse blend of debt is favorable.  
 
Derogatory marks – This type of negative mark on your credit report includes late payments, collection accounts, charged-off debts, unpaid bills, court judgments, bankruptcies and information from public records like: auto repossessions, property foreclosures, delinquent taxes, unpaid alimony or unpaid child support. 

It’s time to get your credit in order!
 
The most important thing to do while preparing to apply for a mortgage loan is to review your credit reports from the three credit bureaus: Experian, Equifax and TransUnion. All three reports are available through www.annualcreditreport.com. You are able to receive one free credit report per year from each bureau. Pay close attention to each account listed and make sure everything is accurate. If there is inaccurate information, you will want to dispute and fix these errors.
 
Make sure all your bills and debt payments are paid on time before the due dates. If you carry credit card balances or other debts, consider paying them down or off rather than moving it around. Don’t close any unused credit credits – keeping them open will show diversity, longevity and help your credit utilization rate. Avoid any activities that might result in a hard credit inquiry and consider delaying any applications for other new debts. 
 
Final word:
 
Don’t worry excessively about your specific credit score. Keep doing the right things and your score will improve over time. It pays to meet with a Mortgage Specialist early on in your home buying process, so they can assist you in reviewing your credit reports and give you guidance on how to improve your credit before applying for a home loan. Call a Mortgage Specialist today at 708-364-2525 or email us at mortgagecenter@emarquettebank.com.