The current market shows purchase contract cancellations caused by declined mortgage applications, failures in loan underwriting from appraised values coming in below the negotiated price, or other problems. Even many home buyers with good credit scores are challenged by tight lending restrictions. In many cases, buyers need to understand how the credit system works and how to achieve the highest possible score in order to avoid problems.
How the Credit System Works
Credit scores are derived from payment histories using a wide range of creditors, including credit card companies, car loans, home loans, and department stores. Information also is obtained from court records, which can include bankruptcy, tax liens, and judgments.
I had a live example last week when some buyers from Wyoming called me to write up an offer on a small cottage in Kohala. They told me that they were talking to a lender in Kona and they were working on getting a pre-qualification letter to include with their offer. They neglected to tell me that that they had a foreclosure on their record from last year, which resulted in getting no financing and giving up on their Hawaii dream.
Homeowners who have experienced a foreclosure on a conventional loan can expect to have a negative credit score for at least 7 years, while a foreclosure on FHA loan can have a 3 year impact. The impact for an owner in a short sale can vary widely, but is much less severe if the owner was current on mortgage payments.
What is a FICO Score?
The most widely used model for assigning the statistical probability of repaying debt was developed by Fair Isaac & Company, and is called the FICO score. The score ranges from 300 to 850; the higher score the better the credit rating.
The National Association of Realtors analysis shows the average credit score for home buyers using conventional mortgages rose to 760 in 2010 from 717 in 2007. A score of 640 is considered to be a minimum score to get a mortgage, but varies among lenders. Twenty-five percent of Americans have credit scores below 599 – almost double the level of two years ago.
How to Improve Your Credit Score
If buyers want to improve their credit score, they need to be paying all bills on time and not taking on new sources of debt before applying for a mortgage, such as buying a car or a truck, or making any other installment purchase.
Buyers are able to find a number of resources online such as:
- http://www.myfico.com/crediteducation/ – provides basic credit education
- www.annualcreditreport.com – a great site where consumers can find free credit scores with no strings attached
Unless you are a cash buyer your credit score is the key of your personal economical health and the most important number you have. There are ways to make sure it is as high as possible, take care of this and you will maximize your ability to qualify for a loan.