Credit Scores - What Do They Mean?

Helping Cleveland First-time Homebuyers

As a Cleveland first-time homebuyer, it is critical you know your home financing options. It is important you base your decisions on solid information and on your unique financial situation and budget. After you have finished reading this article, you will possess a better understanding of credit scores and what part they play in buying your first Cleveland area home. When you meet with your lender you will be able to speak intelligently about the process. Knowledge is power! Together we will be able to select the type of home loan that best fits your homebuying needs.

Understanding Your FICO Score and How it Affects Buying Your First Home

As a first-time homebuyer, you will quickly find out what role your credit score plays in the homebuying process. Ultimately, it determines the interest rate a lender offers to you.

What is a credit score?

Your credit score is a number that lenders use to estimate your financial risk. Time and experience has shown them that borrowers with higher credit scores are less likely to default on a loan.

How is your credit score calculated?

Credit scores are determined by plugging your financial data from your credit report into software that analyzes based on stored algorithms to calculate your credit score. The three major credit-reporting agencies don't necessarily use the same scoring software; it is possible to discover that the credit scores they generate for you may vary.

Why are credit scores sometimes called FICO scores?

Fair Isaac Corporation (FICO) created the software used to calculate credit scores.

Which parts of a credit history are most important?

Here is a breakdown of the approximate value that each aspect of your credit report adds to a credit score calculation.

Use these percentages as a guide:

• 35% - Your Payment History
• 30% - Amounts You Owe
• 15% - Length of Your Credit History
• 10% - Types of Credit Used
• 10% - New Credit

Your Payment History Includes The Following:

• Number of accounts paid as agreed
• Negative public records or collections
• Delinquent accounts:
• Total number of past due items
• How long you've been past due
• How long it's been since you had a past due payment

What You Owe:

• How much you owe on accounts and the types of accounts with balances
• How much of your revolving credit lines you've used--looking for indications you are over-extended
• Amounts you owe on installment loan accounts vs. their original balances--to make sure you are you paying them down consistently
• Number of zero balance accounts
• Length of Credit History:
• Total length of time tracked by your credit report
• Length of time since accounts were opened
• Time that's passed since the last activity
• The longer your (good) history, the better your scores

Types of Credit:

• Total number of accounts and types of accounts (installment, revolving, mortgage, etc.)
• A mixture of account types usually generates better scores than reports with only numerous revolving accounts (credit cards)
• Your New Credit:
• Number of accounts you've recently opened and the proportion of new accounts to total accounts
• Number of recent credit inquiries
• The time that's passed since recent inquiries or newly-opened accounts
• If you've re-established a positive credit history after encountering payment problems

Lenders will check to make sure you aren't attempting to open numerous new accounts. Other factors that aren't included in a credit report include items such as:

• Your income
• Your employment history
• The type of credit you are seeking

What is a Good Credit Score?

Credit scores typically range from 340 to 850. The higher your score, the less risk you are to a lender. As your score climbs, the interest rate you are offered will most likely decline.

Borrowers with a credit score over 680 are typically offered more financing options and “Prime” interest rates, but don't be discouraged if your scores are lower. As a first-time homebuyer, there are many mortgage products available. Those first-time buyers whose credit scores are below 680 could qualify for a Sub-prime loan. Together we will review all loan options with a trustworthy loan consultant.

Multiple Credit Scores

Your bank or lender will pull credit reports and scores from all three major credit reporting agencies: Transunion, Equifax and Experian. They'll probably use the middle score to work your loan application. Ask your loan consultant to explain which credit scores will be used and how they affect your loan application.

The Cleveland area first-time homebuyer specialist

As a Cleveland area first-time homebuyer, you depend on solid information to make well-informed decisions. As your first-time homebuyer specialist, I will help you through every step of the home financing process. Before you search for any homes, make sure you have the right Realtor working for you. As your Cleveland area first-time homebuyer’s specialist, your real estate financing needs are my first concern.

Not sure if you qualify to buy a home? Contact me today and we will meet to discuss your financing options.

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