Credit Scores And Getting a Home Loan

A credit score is a statistical way of predicting how likely it is that you will pay back a loan that might be made to you. the most commonly used credit score today is known as a FICO score. Developed by Fair, Isaac & Co. Inc., the FICO score is a mathematical way to look at factors in your credit record that may affect your ability and willingness to repay a debt.

These factors can include your record of repaying loans, e.g., student loans, car loans, and credit card bills; any public records you might have, like tax liens and bankruptcies; how often you apply for installment loans and new credit cards; and how much you actually owe. For example, if you charge up to the limit on your credit cards - even if combined they don't seem to add up to a lot of money - this might hurt your credit score. Or, if you have recently applied for several credit cards, including department store payment plans, bank credit cards, or finance company accounts - even if you haven't begun to use them yet - your credit score might be affected negatively. However, if you show a pattern of managing your credit wisely, such as keeping credit balances low or paying your bills on time consistently, your credit score will be affected positively.

Your lender looks at other information besides your credit score before deciding whether to make you a home loan. Lenders look at:

• Employment history, including whether you are self-employed
• Monthly debt payments versus your current income
• Savings patterns and amount of savings
• The type of loan you want
• The value of the property you want to buy or refinance
• The amount of the down payment you plan to make or the equity that you have in your home already

All of these factors combined together make up your "loan application" profile.

After collecting this information, the lender evaluates it to decide whether to approve the home loan. Until recently, this was done manually by reviewing each piece of information separately. Today, many lenders use automated underwriting, a computer-based process that evaluates the information easily, objectively and within minutes.

The lender then views the electronic recommendations along with other information gathered to create a full picture of your loan application and makes a final decision about your ability and willingness to repay your loan.

Credit scores and automated underwriting are widely used today because they speed up the mortgage approval process for consumers. What's more, by using credit scores, mortgage lenders treat each person objectively because the same standards apply to everyone. Credit scores assess each factor equally for every consumer, every time. They do not include race, religion, national origin, gender, or marital status as factors. Credit scores are blind to demographic or cultural differences among people.

Information provided by Freddie Mac and the National Association of REALTORS®