Don’t Run From Running Your Credit!

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I see it and feel it when I mention it to a hopeful first-time homebuyer. That cringe of discomfort when I explain that in order to be pre-approved for a mortgage, I’ll have to (gasp!) RUN YOUR CREDIT.

The truth is, there’s nothing scary about the process at all.

There seems to be a misconception out there that allowing a bank or other financial institutions to run your credit will significantly hurt your score. This typically isn’t the case. Running credit is a vital step in determining whether or not a mortgage loan can be issued and involves more than simply learning what a borrower’s score is.

Let’s back it up a bit. The “score” I’m referring to is the number assigned to a person’s credit risk, as determined by Fair Isaac Corporation, or FICO. This number ranges from 300–850 and the higher the credit score, the more favorable the borrower is to the bank when deciding whether or not to issue credit.

WHAT DETERMINES THE FICO?

The FICO score is determined by five factors:

1. Payment History (35%) — whether credit accounts have been paid on time

2. Accounts Owed (30%) — how much of the lines of credit are fully extended (are you “maxed-out” on all of your accounts? That won’t help your score.)

3. Length of Credit History (15%) — how long the credit accounts have been open. Generally, the longer, the better.

4. Credit Mix (10%) — the credit bureaus likes to see an ability to manage payments on a good mix of credit cards, retail accounts and installment loans, such as vehicles and when possible, mortgage.

5. New Credit (10%) — may indicate risk if a borrower has opened a slew of credit lines recently.

By far, the most influential factors of the FICO score are the Payment History and Accounts Owed. These basically answer the bank’s questions of: have you been a good borrower in the past and do you have the capacity to take on another financial responsibility (i.e., a mortgage payment)?

WHAT THE FICO TELLS US

It’s pretty simple — if you have a high credit score, you’re in a better position to borrow. That being said, you don’t need an 800+ score to qualify. We routinely get borrowers approved with score much lower than that!

MONTHLY DEBT

In addition to simply assigning a number as your FICO score, and really, just as important, the bank also wants to see what monthly debts a borrower is required to pay each month. The credit report will tell us what goes out each month. Income comes in, debt goes out. This is an extremely important piece of info lenders look at when deciding if they can approve borrowers for their mortgage loan.

DEROGATORIES

Finally, the credit score will tell us if borrowers have any blemishes in their credit history, or “derogatories”. Were you late on making a payment? How late? How often were you late? And how recent were these lates?

Or do you have any bankruptcies, short sales or foreclosures in your past? Different loan programs have different tolerances for these events and the credit report will tell us exactly what to consider as we weight your options.

SUMMARY

While you don’t want a million different lenders running your credit over and over again, there’s nothing to be concerned with when a bank asks for your permission to obtain your credit report. It give us a complete picture of your FICO score, monthly debts and past credit behavior.

The credit bureaus who determine your score are much more concerned with your history of making payments and amount of debt you’ve currently taken on than they are with a potential borrower trying to get approval for a mortgage loan.

THE NEXT STEP

Maybe being able to buy a home is more realistic than you thought? The only way to know for sure if is to talk with a licensed Mortgage Loan Originator.

If you know someone who would value this info, please share! I look froward to your feedback and comments!

E Mail: [email protected]

Cell: 619–634–9822

Sources: https://www.cnbc.com/id/36737279