After the application of a home loan, you will receive two documents, a loan estimate, and closing disclosure. On the surface, these documents are identical but they both serve slightly different purposes. Up Next: Expenses To Expect In The First Year Of Homeownership Here is what you need to know about the differences between these […]
Understanding Your Home Loan Credit Score
You want to apply for a Kansas City home loan and know that you must have an acceptable credit score in order to do so. However, you’re unsure how credit scores work or how they even apply to Kansas City home loans. What is a FICO score? Why are there three different scores on your credit report and which one do you need?
Thankfully, understanding the credit score basics isn’t difficult when you have the right information.
How Do Credit Scores Affect Mortgage Opportunities?
A good credit score shows lenders that you are a trustworthy and financially responsible person. The higher your credit score, the easier it is to get a good mortgage with lower mortgage rates. Before you get your first Kansas City home loan, be sure to practice good credit building habits. If your Kansas City home loan application was rejected, you can improve your credit score before applying again.
What is a FICO Score?
When you receive your credit report, you will notice that there are three different scores that appear on it. Your FICO score is the only credit score that relates to your mortgage.
FICO (Fair, Isaac and Company) is a company that specializes in analysis software ranging from fraud and security to credit scores. FICO scores help lenders make accurate decisions when it comes to consumer credit risks. They want to ensure that the borrower will be able to pay back their loans.
Credit Bureaus and Credit Scores
There are three types of credit bureaus that monitor credit scores that mortgage companies draw their information from:
Your credit score may be different at each bureau. This difference occurs when your credit information is not reported to all three bureaus or you have credit under a different name, like a maiden name. Each bureau may also weigh variables differently. Your scores should be assessed at the same time to avoid dated scores or other discrepancies.
Which of the 3 Credit Scores is Used & Why?
As previously mentioned, only your FICO score is used when you apply for a mortgage. When considering a potential Kansas City home loan borrower, loan officers will use the middle FICO credit score. For example, if you have a score of 650, 580, and 600, mortgage companies will consider your credit score to be “600”. This practice of choosing the average number helps protect the mortgage company. It is important to remember that while mortgage companies will take the middle score, they will not use the lowest as it would be unfair to the potential borrower.
The 3 Types of Credit that Affect Your Score
When the time comes to repay your Kansas City home loan, there are three types of credit that can affect your overall credit score:
When your scores are calculated, you will be evaluated based on your usage of the types of credit listed above. They can tell both a positive and negative story about your credit history. For example, if you have installment credit, your payment history and amounts owed are calculated into your score.
Installment credit has a predetermined end date and is mostly used for larger purchases like a house. It also includes an amortization schedule. In addition, if you want to borrow more money, such as a Kansas City home loan, you have to fill out another credit application.
Revolving credit is when your credit limit does not change. It allows you to borrow more money at any time after paying a commitment fee. That is, as long as you don’t go over your maximum limit. With revolving credit, there is no set payment plan. However, this can lead to higher interest rates if it is unsecured. Revolving credit can be particularly easy to abuse if not used carefully, since it’s easy to obtain and borrow from. Remember you should not spend more than you can afford to pay back.
Finally, non-installment credit is due in one lump sum by a specified date. Like revolving credit, it can be secured or unsecured. Non-installment credit is short term, meaning that you may have only a month to pay back what you owe. If you do not pay back by the set due date, it can be converted into higher interest credit. Many department store credit cards are non-installment. They can lower your credit score because the more store accounts you open, the higher a risk you are. With each credit account you open, another inquiry is added that can take as much as five points off of your FICO score.
No matter what type of credit you have, you must pay back what you owe on time. If you do not, your credit score can be adversely affected, making it harder to get a good mortgage.