To keep you on top of your credit while you prepare to refinance or purchase a home, you should be aware of the five factors that determine credit score.
- Payment history is a large factor and the one that first comes to mind when thinking about credit scores. Your payment history is the number one thing that will be evaluated for a credit score which determines whether or not you are capable of repaying debt.
- Outstanding debt is almost as heavily weighted in the credit score calculation as payment history. Outstanding debt is not only based on how many credit cards and how much debt you have, but also whether or not you’ve reached your credit limits. For example, person “A” has maxed out a $500 limit credit card. Person “B” has a $20,000 balance with a $50,000 limit. Though person “B” physically has more financial debt, person “A” will have a lower credit score based on his/her ability to manage available credit.
- Duration of credit, or the amount of time you’ve had a credit card or loan, is also an element in determining your credit score. Keeping your accounts open and active is important in building credit. Most importantly, closing credit card accounts can adversely affect your credit score because it shortens the length of your credit history.
- Frequent inquiries for new credit card accounts in a short period of time can also have a negative impact on your credit score.
- Type of credit is the final main factor in determining a credit score. While all credit may seem the same, a the use of a store credit card (i.e. Macy’s) is weighted differently than installment debt (student loan, vehicle loan or mortgage) because an installment loan has a defined end date, unlike a credit card.
Note: Written by Charles D’Arezzo, Sr. Loan Officer NMLS 29022
If you are interested in buying a new house or refinancing the house you’re in, you have probably talked to many banks and mortgage lenders and asked “What’s Your Rate?” It’s a very important piece of information as your interest rate determines what your ultimate payment will be so you know if you can afford the house you want to buy, or if it makes sense to refinance. I’ve been a mortgage lender and broker for 15 years and find that this is the most common first question that I get. I always politely explain that the only accurate way to answer this is to take a full credit application as well as doing market research on the property in question to determine and estimate of it’s current value. If the next question is “That’s great but what’s your rate?” I will again politely tell you I’m sorry I can’t help you and will hang up on you.
Before you think I’m unprofessional for doing this, you need to understand there’s no way to answer this question with any type of certainty so if that’s your only question we’re at an impasse and it’s time to part ways. Many borrowers assume their best course of action is calling 10 banks and mortgage lenders to ask them all “What’s your rate?” figuring they’ll just pick the lowest one they hear and move on from there. This method has roughly the same chance of success as speed dating. In both cases you’ll learn very little about a bunch of different people but will most likely end up getting screwed by someone who didn’t take the time to get to know you first.
As a mortgage borrower this behavior is not your fault. You are conditioned through advertising to be attracted to the lowest rate, price, costs, etc. and banks and mortgage companies (mine included) plaster low rates on every method of marketing we can. Your best course of action to obtain the lowest rate you qualify for is to provide each bank or mortgage lender with a consistent and accurate credit application. This will allow the individual banks and credit companies to provide you with legitimate finance terms that you can actually get. Before you say “I don’t want 10 different companies to run my credit” you need to know that the 3 credit reporting agencies changed their credit scoring guidelines years ago to allow for unlimited credit pulls to be done within the same segment of business (i.e. mortgage companies) within a 30 day period without it negatively impacting your credit or FICO score. This allows you to compare as many companies as you want without worrying that your credit will suffer.
If a loan officer or mortgage broker answers your question with a definitive answer without reviewing your credit profile they are doing you a disservice. If you’re a borrower who has asked “What’s your rate?” please use this as an intervention to stop. Instead, have the same following information available to everyone you talk to:
- Name of all borrowers applying for the loan
- Current address of all borrowers (make sure you have all addresses going back 2 years)
- Property address of house being financed (if different than borrower’s current address)
- Employment and income Information going back 2 years
- Date of birth and social security #’s
- Balance of available cash assets in bank accounts, vested in retirement accounts, etc.
This is a lot of personal information and you should use the National Mortgage Licensing System at http://nmlsconsumeraccess.org/ to verify the legitimacy of a mortgage lender or broker prior to providing any of this information to them.
Not focusing on the “What’s your rate?” question won’t guarantee you a seamless road to financing your home but it will eliminate a lot of wasted time working with companies who offer terms they can’t produce. The truth of the matter is that there are very few loan programs in this day and age and the interest rates are going to be about the same no matter where you look. There are many other factors which are important when picking a mortgage company or broker to work with but that’s the topic for another post.