How Does My Credit Score and Report Affect the Loan I Can Take Out?

Where your credit stands is a very important thing to understand when you start the home buying process*. When your credit is run by a lender, they are looking to see how much of a risk lending money to you may be. Many other factors come into that, including your debt-to-income ratio, other investments you have and other financial information, but understanding your credit score and what your credit report says is immensely important.

Your credit score, also known as a FICO score, is extremely important because it directly relates to your credit history and impacts the rate that you receive on your loan. Depending on the lender’s guidelines, where your credit score stands could mean a substantial rate change or fees.

There are three different credit reporting bureaus that give your information to those who check your credit. You’re given one free credit report on yourself each year from their websites to be able to check the health of your credit. Doing this doesn’t show up on your report, but allows you to understand what is being recorded and make sure that all the activity on there is yours and not anyone else who may have stolen your identity. You can get these free reports at the following sites:

www.transunion.com
www.experian.com
www.equifax.com

Checking each at particular times of the year, like one in January, the second in May and the third in September, allows you to keep a keen eye on your report and stop any malicious activity quickly.

What does this mean for your home loan? Well, the information on your report is used to create your FICO score which is affected by things such as how many times your credit has been checked recently, how many credit cards you have, when you have been late on your payments, and late bills from hospitals, utilities and student loans. All of these things affect your score including if you do NOT have any credit … that is, if you’ve avoided credit cards or other bills that many people have. To find out your FICO score you can go to www.myfico.com and for a nominal fee they’ll let you know where you stand.

As an example, your rate today, based on a 740 credit score or above, may be 5.25% and zero points. If, with the same scenario, your credit score was at 720 there would be a ¼ point charge as a fee for your credit score being lower. At a credit score of 700 there is a ¾ point charge, and below 700 there is a 1 point charge. In some cases, if your credit score is below 700 the loan is unable to be processed. (Break points with credit scores are lender-specific; these quotes are based on W.J. Bradley’s current break points.)

A point is equal to 1% of your loan amount. In the scenario above, a $500,000 loan with a credit score of 740 would have no points, a 720 credit score would cost a ¼ point or $1250, a 700 credit score would cost ¾ of a point or $3750 and under 700 would be 1 point, or $5000. When you see how much your credit score can cost you on top of your loan amount, hopefully you see how important it is to keep your scores up!

A few tips for better credit:

- Make your payments on time. Not doing so shows on your credit report and can heavily impact your credit score.

- Watch your usage as your credit score also relates to your credit limit!

-Check your credit often through Transunion, Experian and Equifax to catch problems early and have them resolved. You can receive a free credit report through each site yearly.

-Remember that hospital bills, utilities, school loans and other non-consumer debts can show up on your credit report if they are sent to collections. All of these need to be managed with care.

* W.J. Bradley is not a credit counseling or financial advisement firm and this information is for educational purposes only and is not to be taken as guidelines or guarantees to improve your credit or financial situation or eligibility to secure a home loan.