The Importance of Credit Scores in Florida Home Loan Applications; How to Make Yours Better

Many important factors will influence your efforts to secure the perfect Florida home loan, but the most universal (and probably most important) is your credit rating. Surprisingly, most people are ignorant of what their credit score looks like, how it can hurt or help them, and how crucially mortgage lenders view it.

After all, pretty much any lender uses credit scores to determine whether to grant home loans to consumers, and at what interest rates.

“Credit scores are very powerful predictors of consumers’ future (bill-paying) performance,” Mike Fratantoni, Senior Research Director at the Mortgage Bankers Association, said.

The most widely used ranking system is the FICO credit score, developed by Fair Isaac Co. To calculate its scores, the company uses 22 pieces of data collected from the three major credit bureaus - Equifax, Experian and TransUnion - ranking consumers in the 300-850 range (the higher figures indicating superior credit).

The final number is a composite of individual ratings in five categories, weighted as follows:

• Payment history (35 percent)
• Outstanding debts (30 percent)
• Length of credit history (15 percent)
• Types of credit used (10 percent)
• New credit (10 percent)

Income, contrary to popular belief, is not a factor. After all, a person can have a very high income and still never pay their bills. A FICO score is calculated using the data provided by each credit bureau, and it’s common to see 50-point differentials between ratings. Because bureaus collect data at different times of the month, one may have inaccurate information, or be using data that isn’t current.

The bottom line is that the higher the score, the lower risk you present to a Florida home loan provider, and the less interest you’ll subsequently be hit with. Believe it or not, only 13 percent of the population has FICO scores of 800-plus, while the median is 723. There is no standard cut-off for home loans, as lenders employ their own regulations.Generally, however, those with scores above 740 receive the best rates.

To see your FICO score affects how you, take a 30-year, fixed-rate mortgage of $350,000. You would pay 6.24 percent in interest (or $2,153 monthly) with a score in the 720-850 range.

But, if your score drops to the 620-674 level, your rate jumps to 8.05 percent, and your monthly payments will soar to $2,581. That means an additional $154,131 in payments over the life of the loan, and many people are subsequently drawn to risky mortgage options designed specifically for applicants with bad credit.
Want to check out your FICO score? Another common misconception is that you can get your FICO score from your credit report. That’s not the case, but getting a credit report is still a good starting point. As per federal law, you are entitled to a free credit report from each major credit bureau once every 12 months. Most consumers rate annualcreditreport.com positively, as reports generally arrive within 10 days.

A TIP: Request a report from a different agency every four months so you stagger the three reports over the course a year. That way, if there’s bad information in one, it will be brought to your attention sooner.

Remember that your credit report and score are not the same thing. When you request a free credit report, a bureau will offer to calculate your credit score — for $6.95. Experian and TransUnion use proprietary formulas, while Equifax uses FICO scores. Pass up these offers, because the information is not as comprehensive as you’ll get elsewhere.

For the most detailed explanations on your FICO scores, go straight to the source — the credit education area at myfico.com. A score from one credit bureau costs $14.95, all three are $44.85. It’s useful to buy all three because large lenders either average the scores or take the middle one. Check your FICO scores several months before you apply for a home loan, whether it’s a conventional mortgage or a Florida home equity loan, so you give yourself ample time to address any issues that arise.

While negative factors that bring your score down remain on your report for seven years and can adversely affect your FICO score, lenders typically look at the past two years. One 30-day late payment shouldn’t make a difference, as lenders are more interested in long-term trends.

THE KEYS TO A GREAT SCORE:

– Pay all bills on time. This is probably the most obvious, and important, factor in the FICO calculation. If you’re consistently 30 days overdue, your score can drop by as much as 100 points, depending on how long an account has been open and how long ago the late payment(s) took place.

– Think before closing accounts. Lenders are looking for consumers with long credit histories that manage it well. But, because of identity theft, you don’t want too many open accounts that you don’t use. Be judicious and consider the lasting impact of your actions.

– Keep your balances low. The FICO score evaluates your total balances in relation to your available credit, known as credit utilization. Credit cards that are maxed out can lower your score, so try to spend only 30 percent of your credit limit. In other words, if you have a $10,000 limit on one card, keep the balance near $3,000.

– Minimize credit card applications. On average, a consumer has a total of 11 credit obligations - seven credit cards, four loans. Each time you apply for some form of credit, a lender requests to view your report. This inquiry is noted and can reduce your overall score, so refrain from applying when it isn’t needed. Avoid applying for any credit 18 months prior to your Florida home loan application or request for a similar, highly-important item.