Sooner or later, every buyer has to submit information to a lender regarding their credit history.  This information will be critical as a means by which a decision will be made as to whether the potential buyer will qualify for the loan to purchase their future home.  This is a time that makes many people anxious because they are not quite sure how their credit is evaluated. So, whether you are considering a Piedmont home or an Oakland home, the format remains the same. 

Right now, 90% of the largest banks use what is called a FICO score to make that decision.  This FICO score is used throughout the industry to determine your mortgage rate, as well as your car loan and your credit card monthly interest fee. 

This credit rating is a number that is arrived at by evaluating your credit history in detail, but it is basically a number that predicts your credit risk based on all the available information.   FICO scores range from 200 to 800, with scores above 620 being acceptable to qualify for most mortgages.  The average score in California is 691.

Here is how your score is assigned:

Information from five different sources is used to finally arrive at a figure that will be assigned to you.  These five sources have different weights, or percentages, assigned to them, since they are not all considered equal in importance. They are listed below in order of that importance.

a. Payment History--35% of the Score--Did you pay your obligations on time?  Did you pay them completely? Were you late? Have you a history of collection activities, liens against you, or any bankruptcy filings?

b. Amounts Owed--30% of the Score--Do you owe a lot of money on a lot of accounts? Are you overextended, or do you have simple amounts due which represent low percentages compared to your current available credit line?

c. Length of Credit History--15% of the Score--In general, the longer your credit history, the better.  That represents stability, and shows an ability to handle funds and credit.

d. How Much New Credit Available--10% of the Score--Opening many new credit accounts is not looked upon favorably.  It represents more of a risk, and evaluations are made as to the number of recently opened accounts, the proportion of accounts recently opened, and by the types of accounts sought.

e. Types of Credit Used--10% of the Score--Ideally, the potential buyer will have many different types of loans-installment loans, credit card loans, and of course, ideally a former mortgage.  This is favorable because it represents a stable and varied credit history.

So, while a lot goes into compiling a FICO Score, this score represents, when all is evaluated, your ability to take on a loan, carry it in a responsible manner, and pay it off as promised.  With this information, you can begin to assess your potential credit evaluation by the lenders. 

Posted by Bruce Wagg on


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