If you are considering buying a home in the Greater Portland Maine area, your credit score plays a very important part in the home loan process. Typically they range between 340-850 and are calculated by three reporting agencies, Transunion, Equifax, & Expirian. The formulas they use may differ so your scores may vary. Lenders lend money based on your level of risk, the better your score (700 or better) the more favorable your rate and options. One important thing to note is the public score on the above mentioned sites will most likely differ from the bank score as they use the FICO algorithm.
They are essentially investing in your ability to pay back a loan. The term "mortgage" refers to collateral, you are using the home as collateral to pay back a loan. Your FICO score is calculated using the following formula; 35% is payment history, 30% amounts owed, 15% length of credit history, 10% new credit, and 10% types of credit used.
1) Pay your bills on time - one late payment can really have a negative impact on your score.
2) Check your credit report regularly to make sure it accurately reflects your history. If there are any errors or discrepancies have them cleared up immediately.
3) Keep your existing debt levels at less then 30% of the total credit available to you. High balances have a negative effect as well. Remember, the reporting bureau's check on a monthly basis in order to formulate your score. Length of credit history is also an important factor. Think consistency!
4) If you plan to apply with a few different mortgage servicers have them all pull your credit within the same two week period, credit scoring models will most likely recognize that you are shopping for a loan and it won't affect you your score much. Try to avoid having numerous different types of inquiries. They say that you should have no more then 3 in an 18-month period, outside mortgage pulls. If you haven't found a home within the time that the mortgage pre approval letter expires they can usually do a soft pull that doesn't even show up to make sure nothing has changed.
5) If you need to repair your credit seek guidance. There is a strategy behind credit repair and it takes time, be patient and consistent. Some cases take longer then others and it's important to team up with someone that speaks the creditors language.
There are home loan products for those that don't have perfect credit, consider the FHA (Federal Housing Administration). They were originally offered for those that had challenged credit and smaller down payments. They currently allow you to put a minimum of 3.5% and finance your closing costs, down but please note that you will be required to get PMI (private Mortgage Insurance) since it's under the conventional 20%. Unlike a conventional loan, the PMI on an FHA stays with the life of the loan and doesn't go away. There are also upfront premiums you'll have to pay. Check with your loan officer to see exactly what will apply to you.
Improving your credit and maintaining your score are tricky, I think it's important for all potential homebuyers to understand how it works. Take the time to talk with your loan officer and ask as many questions as you need to in order to feel comfortable. Anybody that doesn't take the time to educate you fully isn't worth your time and money. I always sit down with new and repeat home buyers to discuss their needs, wants, lifestyle, and discuss the process. You are making quite possibly the biggest purchase of your life, and informed decision is a sound decision.
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