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When you apply for a Connecticut home loan, we will need to know something about your credit history and how much credit risk you might represent to a lender. Credit Score - How it impacts your interest rate To get this information we look at your credit score and recent payment history. This information will tell us how much credit is available to you today and give us an indication of the level of interest rate that you will have to pay for a CT mortgage. By helping you to understand how your credit risk is evaluated, you will be able to manage your credit risk and take the necessary steps to improve your credit score over time. If you protect and improve your credit score, you will reduce your credit risk and give yourself better financial opportunities in the future.
What is a Credit Score
A credit score is a number, between 300 and 850, with 850 being the best, that tells a lender if they are prepared to give you a Connecticut home loan and at what approximate interest rate. Your credit score number is an instant credit rating today, telling a lender how likely you are to repay a Connecticut home loan on time, if they were to extend credit to you. It doesn’t tell us if you are going to repay the loan, we are not asking that question when we look at your credit score, it just tells us the probability of your being late in making your payments.
Sometimes you will hear people refer to your credit score as your FICO score. FICO stands for Fair Isaac Company, the organization that invented one of the credit scoring system that is so widely used today. Their information on your credit comes from consumer credit reports which are kept by various credit reporting agencies around the United States. The algorithms (mathematical and statistical formulas) used to derive your credit score, are confidential to the Fair Isaac Company and nobody knows exactly how they work. They look at a lot of different information on your consumer credit reports and then compare that with a vast database of similar information on many other people. From this information they derive your level of future credit risk. We, at Acorn Home Mortgage, have a better than average understanding of this process and hope that you will take a little time today to read this information and learn about how your credit scoring works.
If you have already read our guide to the CT mortgage process, then you will already realize that the decision to approve a Connecticut home loan is not based solely on your credit score. Your credit score is just one component of a complex banking evaluation to determine not only if a CT mortgage bank will lend to you, but also on what terms and conditions. At the same time we will also evaluate what particular CT mortgage product(s) will best fit your circumstances and requirements.
How does Credit Scoring Help You
The credit scoring process helps you because it allows a lender to quickly and efficiently determine your credit risk on a totally unbiased basis. In the days before credit scores, the whole process of making lending decisions was very slow and cumbersome. It could often take months for a lending decision to be made, and then the result could be unfair - it was certainly an inconsistent process. Today, these credit decisions can be almost instant with a CT mortgage being approved within hours, provided that you fit the profile of the lender in question. These credit decisions are unbiased with no personal bankers’ ‘hunches’ or factors such as gender, marital status, nationality, race or religion being taken into consideration. The whole process is much fairer. Also, any problems that you may have had with credit in the past, diminish over time provided that you improve. Serious credit issues will be harder to get away from like a past bankruptcy or late mortgage payments but generally recent good credit will weigh more heavily than the past. These FICO algorithms also indicate that even if you have had past credit problems, you have been managing your credit more responsibly since that time. This is the type of positive information we bankers want to see.
The credit scoring process has also made lending easier, resulting in more available consumer credit. There is more credit because lenders can agree more loans in the same time period. Also, because of this faster credit process, if you don’t make the minimum lending requirements for one Connecticut home loan program, we can easily submit you to a different lender where you will be approved. Generally speaking, we at Acorn Home Mortgage will know exactly which lenders will have appetite for your particular application.
Credit scoring has also reduced the cost of the CT mortgage significantly. There are three reasons for this. Firstly, with more credit in the Connecticut market, there is greater competition amongst the Connecticut lenders themselves. Secondly, because the credit scoring system has streamlined the decision process, it costs a Connecticut lender less in administrative overheads to grant a Connecticut home loan. These savings are being past on to you, every time we get lenders competing for your loan! Thirdly, because lenders now have better control over potential losses, they can reduce their rates still further.
The Credit Reporting Agencies
When we are evaluating your CT mortgage application, we will buy your credit report from the credit reporting agencies. These reports tell us all about your credit history, as it has been reported to these agencies. They tell us about the types of credit you are using, how long you have had these accounts, and if you have paid these accounts on time. It also tells us how much credit you have available to you today and if you are looking for further credit with other companies. We can get a much better view of your credit than if we were your retail bankers just looking at our own records.
The three main credit reporting agencies that we use to evaluate your credit are called Equifax, Experian and TransUnion. If, after we have bought your credit report from one of these agencies, you think some of the information is incorrect (which is often the case) then contact the agency and tell them. Credit reporting agencies are required by law to respond to you within 30 days but they usually are much faster. There are many reasons for errors on your report. The most common reasons that we see are the inclusion of information about somebody else by mistake, processing errors made while entering hand written information, wrong SS# being entered, payments applied to the wrong account and problems with people that apply for loans under different names (no, not fraud, just an initial missing or using an abbreviated first name).
The credit reports that we request are different to the reports that would be given to you. We are in the mortgage business and request credit reports formatted in a certain way. We are also not allowed to give you a copy of your credit report because we are not a credit reporting agency. We can share this information with you though, the Uniform Residential Loan Application - Form 1003 will contain your current credit exposure and monthly payments. You will be able to examine these when we ask you to sign the application and at that time you can tell us if you don’t recognize any of these debts. We can also give you the telephone numbers and account numbers relating to any collections and other adverse conditions so that you can investigate these and try to correct them.
How to read a Credit Report
A personal credit report will start with the identifying information at the top. It will list the name, address, the Social Security number, date of birth and employment information of the person to whom it relates. Make sure that this is you.
It will then contain a list of your credit accounts called your trade lines. This is where your lenders report each loan or account they have opened with you, telling us the date you opened the account, the credit limit or the total loan amount on the account, the current balance and how promptly you have made all your payments so far. These trade lines cover your credit cards, bank loans, auto loans and also any current mortgages.
There will also be a listing of credit enquiries separated into two categories, those initiated by you and those not initiated by you. Every time you apply for a loan you authorize the lender or business to request a copy of your credit report. This authorization shows up as an enquiry initiated by you. Your credit report will list every enquiry for the last two years. But there will also be credit enquiries not initiated by you and these relate to lenders that make you unsolicited credit offers by mail etc., As bankers, we are only interested in the level of credit enquiries initiated by you.
The final section relates to information which may have been collected on you concerning any past or current collections for unpaid loans. It would also contain any public record information on you covering foreclosure and bankruptcy, any law suits, liens, judgements against you and the amount of any garnishing of your salary for child support and/or alimony.
When we ask a credit reporting agency to send us a copy of your credit report, we also request your credit score. To actually have a credit score at all, you need to have at least one active account which is older than six months. You also need to have an account which has been updated in the last six months which could be the existing account or a more recent account. The system will not calculate a score at all if you don’t have at least the above minimum level of activity.
Our credit reports are taken from the three main credit reporting agencies and each agency has a slightly different algorithm for calculating your score. Information held by each of these three main credit reporting agencies may vary because not all lenders report to all three agencies. Often, the same information can be reported to different agencies in slightly different ways. The accepted practice in banking is to take the middle score of the three agencies.
Our lenders don’t depend entirely on these third party credit scores but have terms and conditions of their own which will vary depending on the CT mortgage product in question. Most lenders use what we call credit scoring systems today but it will also include numbers assigned to your Uniform Residential Loan Application form. That means they also look at factors like length of time in current job or your level of income for example. These and many more factors are not even considered on a simple third party credit score from a credit bureau. If you are already a current borrower and refinancing your CT mortgage with a portfolio lender (a bank that keeps the CT mortgage and does not sell it in the secondary market) then the lender will put much greater weight on your existing payment history with them. All our lenders have different thresholds, ratios and requirements but we can guide you to the right lender for your particular needs and credit condition.
What is the Average Credit Score in America?
Most of the population of America have a credit score which is above 620. The average credit score is about 677 with only about 10% of the population having a credit score higher than 800. Only about 10% of the population have a credit score below 550. In the recent past we have helped some of our customers to find a Connecticut home loan with average credit scores as low as 500. As long as you are prepared to work with us, we will help you.
What information goes into a Credit Score
The five basic factors said to be taken into consideration when calculating your current credit score are your payment history, your length of credit history, the amount of money you owe, any new credits you have recently put in place and the types of credit you are using. It is very difficult to determine which of these factors is the most important in your credit report because there are so many variables. The algorithms that produce these scores are being modified and improved all the time with increasing information and changing credit patterns across the country. Depending on your particular credit history, changes in some factors may have a greater influence on your credit score than on others. However, your payment history is by far the most important; making late payments will definitely reduce your credit score and consistently making payments on time will raise your credit score.
1. Your Payment History
When applying for a CT mortgage, any banker is going to pay particular attention to your payment history. So it’s obvious why we tell you that this is the most important factor in determining your credit scoring. There is no need to panic though, if you miss the due date on the occasional credit card payment. If you are generally responsible with credit and have a good credit history then a few mishaps may not even reduce your credit score at all. Of course a Connecticut mortgage loan officer will be able to see recent late payments and may increase your interest rate accordingly so you still need to be careful. Also a Connecticut mortgage loan officer does not like to see late CT mortgage payments. If you’re going to be late on any payment, make sure it’s never your CT mortgage. It’s also import to understand that if you have no late payments at all, in keeping with some 60% of all credit reports, you cannot necessarily assume that you will have an excellent credit score.
When looking at your payment history on all your accounts, the credit agency will be looking at all your major credit cards like Visa and Mastercard, your store cards and your installment loans like car payments, student loans and mortgages. They will factor in any adverse credit information they find on public records and these will weigh quite heavily. Obviously older items and smaller issues will be considered less serious than more recent events but bankruptcies can effect you credit score for up to ten years, depending on the program.
In analyzing late payments the system will consider not just how late you were but how much money was involved. It will also look at ‘recency’ and ’frequency’, as we say, - when they occurred and how often. If you tend to pay all your bills on time but you had a 90 day late payment a few years ago then your credit score will not be reduced significantly. If you have a number of current 60 day late payments though you will not be scoring as well.
Simply expressed, collections and judgements against you will have a major impact on your credit score. If you have some late payments, start making your payments on time, catch up missed payments and keep everything current in the future. Never pay off a collection account until the collection agency agrees to remove it from your credit history. There is no value in paying off an outstanding collection (unless required to do so by a Connecticut mortgage loan officer before closing) if, at the same time, it is not removed from your credit record - the damage has already been done.
2. Your Length of Credit History
The longer you have had good credit the better your credit score. You can still get a good credit score even if you haven’t had a long history of good credit, but everything else would have to look good as well. The algorithm seems to make calculations based on the age of your oldest credit accounts, the average age of all your credit accounts and how often you use these accounts. At First American Mortgage we often talk to people that have no credit score at all. When starting out, don’t open too many credit accounts at once and don’t build up credit on them too quickly. If you have a short credit history all ready then don’t go out and add lots of new credit because the score is based not only on the oldest credit account but also the average age of all accounts. Adding new credit accounts will reduce the average age of your credit history.
3. The Amount You Own
If you read The CT Mortgage Process, you will find out how we Connecticut mortgage loan officers determine how much you can afford to borrow. With automated credit scoring systems that do not have information about your earnings, it’s impossible to determine if you are over-extended based on your level of borrowing. However, these algorithms often try to make this part of the equation. They will make assumptions based on the amount of available credit you have used, the ratio of one type of loan to another and the number of balances you have. They will look at how much you have paid off on installment loans as a guide to your willingness to repay debt.
Our best advice at Acorn Home Mortgage is to manage your credit cards well within their limits and to not have too many credit accounts open in the first place. Often you will be told not to close credit accounts that have a long positive payment history just because you are not using them. To do so might be to remove valuable credit history from your credit record. This may be true but it really depends on how much alternative good credit history is already on your credit record. The important point to remember is that closing those credit accounts will not raise your credit score.
People often think that opening a number of new credit cards to increase their available credit is a good way to increase their credit score. We have not found this to be true and in fact may be quite the reverse, it may actually reduce your credit score in the short term. Consolidating debt to improve your credit score is also something often recommended today but is it true? When you consolidate loans purely from a credit scoring point of view, you will often find that your credit score reduces slightly. This is because you have the same amount of debt but fewer accounts. Better to pay down your loans if you want to improve your credit score than to just move your debt around.
You should consolidate debt to reduce your interest payments and make them more manageable. The best way to consolidate debt if you are a Connecticut home owner, is by taking out a Connecticut Home Equity Loan. These loans will give you the lowest possible interest rates and often the option to right off interest against your taxes.
4. The Types of Credit You Are Using
Many of the automated credit scoring systems will look at the different types of credit you are using and in what ratios. They will be examining how many store cards, credit cards, finance company and installment loans and mortgages you have open. We’re not suggesting that you need to have one of everything, in fact the opposite, never open credit accounts that you are not going to use. If the algorithms are short of information in other areas of the credit reports then this type of information may be more significant in trying to determine a final credit score. Remember that there is a greater probability of a person defaulting on their CT mortgage when they have a large number of credit cards than when they have only a few. It may not be a good idea to have too many credit cards if you want to achieve the best possible credit score.
5. New Credits You Have Recently Put In Place
With all the freely available credit we find around us today, these credit scoring algorithms do try to take into consideration the different profiles of various borrowers. If you only have a short credit history and are suddenly applying for a lot of new credit then statistics show that this represents a higher credit risk – your credit score will reduce. Although multiple credit applications over a short period of time generally tend to indicate a growing credit risk, most of these credit scoring algorithms are now programmed to recognize the patterns of rate shopping. If you are looking for a good mortgage deal then try to confine your searches to within a 30 day period. Most credit algorithms do not include enquiries made within 30 days of the scoring date. Alternatively, we at Acorn Home Mortgage could do all the work for you instead!
The credit scoring process will look at the number of new credit accounts you have opened and the type of credit account they represent. It will classify them as national credit cards, store credit cards, installment loans etc and some of these systems will even work out the ratio of old to new credit accounts. It will also index you based on the length of time since you actually opened a new credit account, and the number and dates of previous credit inquiries, even if not successful. Looking for credit, even without opening any new credit accounts, is still statistically an indication of a deteriorating credit profile.
Having said all this about credit enquiries, they don’t actually depress your credit score by that much. The average credit enquiry only takes two or three points off the average borrower’s credit score. If you have only a short credit history or just a few credit accounts then the effect may be greater. If you have a large number of credit enquiries then we are back to talking about statistics again and historical loss norms. The more credit enquiries on your credit report, apparently the more likely you are to declare bankruptcy.
We should tell you at this stage that there are many credit enquiries that don’t reduce your credit score. When we at Acorn Home Mortgage submit your Connecticut home loan application for a CT mortgage to a Connecticut Home Loan officer, it doesn’t count against your credit score. Credit requests for lenders to issue a pre-approval for a CT mortgage don’t count even though they show up on your credit report. Credit reports requested by your employers do not get counted in the credit score and neither do requests made by you for your own credit report.
How to Interpret A Credit Score Report
When we look at your credit score report, as explained in detail under The CT Mortgage Process, it only provides part of the total picture for you to qualify for a Connecticut home loan. Our reports are combined credit reports using information and credit scores from all three of the major credit bureaus. As well as providing a number from between about 300 and 850, the reports also contain a number of reasons as to why your credit score wasn’t higher. We have large listings of ‘reason codes’ and we would be happy to share that information with you.
If you ever feel you have been treated unfairly with respect to any credit application in the US, you are protected under the Equal Credit Opportunity Act (ECOA). This act entitles you to know the reasons for being declined credit within thirty days. You are also entitled to a free copy of your credit bureau report within sixty days which you should request from the credit reporting agencies.