Posts Tagged ‘Mortgage approval’

YOU AND YOUR CREDIT (FICO) SCORE

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 FICO scores measure the risk that an individual will default by evaluating their history of credit management. The exact formulas used are top secret but FICO has given the following components and the approximate importance of each:

35%- Payment History. Late payments of bills such as Mortgage, Credit Cards, Car loans etc will lower a person’s FICO score . Paying bills as agreed over time will improve the score.

30% – Credit Utilization. The ratio of current revolving debt (Credit Card and Charge Account balances) to the total available credit (Credit Limits). Consumers can improve their FICO scores by paying off debt and reducing balances to less than 50% of the available credit. Closing existing revolving charge accounts can have a negative effect on this ratio, and lower your score. Before closing accounts be sure to do some more research, or get qualified advice.

15% – Length of Credit History. Time improves FICO scores without any action other than paying all bills on time.

10% – Types of Credit Used. FICO scores are improved by having a good history of managing multiple types of credit (Installment, Revolving, Consumer finance etc).

10% – Recent Credit Applications. Multiple requests to obtain new credit over a short period of time can hurt an individual’s FICO score. However, individuals shopping for the best rate for a Mortgage or Auto Loan over a short period will not see any negative impact on a FICO score.

For more detail on this and other Credit Related questions the following link is a Gold Mine of factual information.

http://www.myfico.com/CreditEducation/

Pre-Approval NOT Pre-qualification

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Once you begin thinking about buying a house the most important thing to is do is find out two things:
1. How much a Bank will lend you.
2. How much your payments will be (including taxes and insurance)

There is little point in going out looking at open houses etc if you don’t know whether you can afford them. Save yourself a lot of time and frustration by getting Pre Approved. This is NOT the same thing as Pre-Qualified.

Pre-approved means you have a written commitment from a chosen Lender stating that your personal financial data has been checked out and your loan is ready to go as soon as you have a contract on a suitable home. Now is the time to get out for some serious house hunting knowing exactly what you can afford.

Pre-qualification is next to useless. This simply means you have given some general information to a Lender who can “honestly” say that providing what you say is true you will be able to get a loan. Until your income, credit, down payment, etc has all been proven you are not really ready to start looking.