One, if not the, most important factors in determining what kind of mortgage you qualify for is your credit score. The problem is that how the credit score is calculated can be a bit confusing. The scores can range from 300 to 850. Now while the formulas used to calculate a credit score are proprietary information, here is an approximate breakdown of what makes up your credit scores:
- 35% of your Score is Payment History. This includes late pays, collections, bankruptcies, & foreclosures. Additionally, the more recent derogatory credit is, the more it affects your score.
- 30% of your score is based on your outstanding debt. How much do you owe on loans cars or homes? What percentage of your revolving credit accounts are in use? General trigger levels are 30, 50 and 70% of your credit limits.
- 15% of your score is based on your length of credit history. The longer you’ve had the accounts, the better. A common mistake people make is closing credit cards after they pay them off. If it is an old account, this can drastically lower your average length of credit history.
- 10% of your score is based on new credit. Opening new credit accounts temporarily lowers your credit score. This is to prevent a run of opening up excessive credit before history with new accounts can be established. This also includes hard inquires (inquires you authorize).
- 10% of your score is based on the types of credit you have. It is good to have a balanced mix of both revolving account (credit cards) and installment loans (Car loans & Mortgages). This shows you know how to manage all types of credit.
There are three separate credit bureaus Experian, Equifax and TranUnion. They each use their own variation of the Fair Isaac credit model. (This accounts for some of the variations in each score). Additionally, creditors can choose to report payment history to one, two or all three credit bureaus.
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