Understanding Credit
How Credit Scores Work
Credit is one of the most important components in the mortgage approval process. Lenders look at a borrower’s credit score, number of open accounts, payment history, type of credit borrowed and a series of other factors when determining the level of risk in each lending scenario. Down payment requirements, loan programs, flexibility on income, and even interest rates can be impacted by a slight bump in a credit score.
Key Factors that Affect Your Score
Once credit has been established and maintained, credit scores are based on five factors to varying degrees: payment history, amounts owed, length of history, credit usage and new accounts.
Payment History
It’s essential to pay credit bills on time. Every late bill, collection, judgment, or bankruptcy significantly drops your score.
Amounts Owed
It’s a good rule-of-thumb to borrow 40% or less of your available credit balances – going over hurts your score.
Length of History
Easy rule-of-thumb: the longer your accounts are open, the more positive impact it will have on your overall credit score.
Credit Usage
Having other debt like open credit cards shows creditors that you have experience responsibly borrowing money.
Credit Inquiries
It’s a red flag to have multiple credit reports pulled in a short time – even if you’re rate shopping.
New Accounts
Opening new accounts over a short period generally indicates greater risk – especially for those without much credit history.
Establishing Credit
Several factors can be used to establish credit initially, including bank accounts, employment history, residence history, and utility bills. Credit may be initially obtained through a bank, where a credit card is linked to money deposited in the bank.
Understanding Credit FAQs
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My credit score is bad – how can I improve it?
You can work on each of the five areas detailed above that comprise your score. As you improve on these, your credit score will reflect that. UW Funding can work with you on improving your score toward taking out a mortgage.
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How high of a score do I need to take out a home loan?
Generally speaking, 620 or higher – though this will differ between individuals, lenders, and mortgage programs.
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I’ve never had any credit and I don’t have a credit score. Should I get a line of credit and work on having a good score?
In short, yes. Having a good credit score will allow you to do lots of things – like finance a car, rent an apartment, and purchase a home – for the lowest cost to you.
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