Credit Score Essentials for Qualifying for a Mortgage or Home Loan
Hey there, Paul Carson here, Philadelphia Mortgage Brokers. And one of the conversations I have on a daily basis is always coming back to credit scores. And folks want to know not only what their scores are, but how they can improve them or what might be affecting them negatively. And it's hard to give specific credit advice unless you're actually seeing someone's reported profile in front of you.
But generally speaking, there are five factors that have an effect on your credit scores. I want to run through those today and give you more of the weight and a little bit of the why behind that. Of the five factors that have an effect on your credit score, the one that's weighted the most is on-time payment history.
So it accounts for about 35% of your credit score is paying your debts on time. So whether that's credit card, an auto loan, or a mortgage, an on-time payment history is essentially more or less a third of the way towards a positive credit score. So if you've had a on-time payment forever, that generally leads to a higher credit score.
If you've had recent late payments, this is where you can see points subtracted very quickly, especially for a recent late payment. Timely payment history, making sure your bills on time, that is by far the most important factor and the heaviest weighted in the FICO model.
The second most important factor when it comes to weighing in to what your FICO scores are is your approved percentage of your revolving line. So let's do some simple math. Let's say you had a credit card with a $10,000 line and you had a $9,000 balance on there, you'd be using 90% of that available credit. The ideal range that you want to keep your revolving balance is less than 30%.
So if you're keeping a balance on that card of less than 3000 per month with a $10,000 limit, that's essentially 3000 or less would be your ideal target range to keep a 30% utilization ratio. So if you have that balance, it's about $9,000 in the $10,000 card, you're going to see your score is really being pushed down as a result of that balance being close to the limit.
So the lower your revolving balances are, the better off your scores are going to be. because it's seen the FICO score model as just the responsibility part of it. So higher balances means it's generally just a little bit riskier, and that's where your credit score starts to come down a little bit.
On the other hand as well, we see that when folks have those higher balances, but then make payments down to the ideal levels, ideally that 30% or less zone, or even as close to zero, we do see that oftentimes scores go up as well. So I will say everybody's situation is definitely unique in this front, but something to consider is have your revolving lines, like credit cards, you want to keep those, those balances below that 30% mark.
The third most important part of your FICO score in the model is the length of credit history. So if you've had accounts open for a long time and they're generally positive and been paid on time, those are really healthy accounts when it comes to your overall FICO profile.
Let's say you are newer to getting credit and you don't have a ton of years on your credit lines, we might have what's called a lack of credit debt. So someone who has maybe a brand new credit card or a recent auto loan, it's something that's only one, two or three years, they're newer to the kind of the credit money credit scoring model. That doesn't mean that you can't have excellent scores, it just means that they're that length of credit history is not there yet.
When we look at it as a third factor, the length of credit history, it makes them about 15% of your score. So of the pie, we're looking at the 15%. It's important, don't get me wrong, but it doesn't have as much weight as on-time payments and utilizing your revolving balances responsibly.
That brings us to our fourth point is it's called credit mix. Ideally, you want to have a healthy mix of different types of credits. So for instance, we could have a mortgage, we could have a car loan or a student loan, which are installment loans, and we could have a credit card. Those are your different types of credit.
Here's how I like to think of credit mix. You could individually go get yourself some pretzels, you can get some peanuts, or you could go get some trail mix, throw them all together and get a healthier mix of prep. So think of it this way: a mortgage, or a student loan, or car payment, those three things are considered an installment loan. The idea behind it is if you have an installment loan, if you had a revolving card, those types of mix of credit would be ideal versus someone who only had a small credit card might not have that healthy of a mixer credit.
But again, it's having the right mix of credit. It's only about a 10% a portion of your FICO score. Not the most important factor, but definitely something to consider. It's not necessarily something you want to work on like, oh, I have to go get this type of debt or install the loan just to have this right credit mix. That's not what we want to do here. Just if you so happen to have an installment loan, oh, great. That kind of gives you that mix of credit you already have.
As we tie this all together, the fifth factor that goes into your FICO scores is recent inquiries. So in a perfect world, we want to minimize the amount of inquiries that you've had as you're getting ready to apply for a mortgage. However, just because you've applied for a mortgage with somebody else, it doesn't mean it applying with the second or third lender could may or may not have an impact on your scores depending on your situation.
I would say the higher your credit score, is the less likely another inquiry would have an effect on your score. However, if your score is on the lower end of the side, having multiple inquiries definitely could hit you multiple points each time. Keeping in mind, these five things that affect your credit scores, more than likely, you're going to have questions about how credit affects your specific scenario.
So whatever questions you might have about credit, how it applies over to the home buying process, to the mortgage world. Let us know how we can help. Reach out to us and our team at Philadelphia Mortgage Brokers so we can set up a time and get your plan in place and get you credit-ready to buy a house in the future months.
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