5 Factors That Decide Your Credit Score
Credit scores range between 200 and 800, with scores above 620 considered desirable for obtaining
a mortgage. The following factors affect your score:
1. Your payment history. Did you pay your credit card obligations on time? If
they were late, then how late? Bankruptcy filing, liens, and collection activity also impact your history.
2. How much you owe. If
you owe a great deal of money on numerous accounts, it can indicate that you are overextended. However, it’s a good thing if you have
a good proportion of balances to total credit limits.
3. The length of your credit history. In general, the longer you have had accounts
opened, the better. The average consumer's oldest obligation is 14 years old, indicating that he or she has been managing credit for
some time, according to Fair Isaac Corp., and only one in 20 consumers have credit histories shorter than 2 years.
4. How much new
credit you have. New credit, either installment payments or new credit cards, are considered more risky, even if you pay them promptly.
5. The types of credit you use. Generally, it’s desirable to have more than one type of credit — installment loans, credit cards,
and a mortgage, for example.
For more on evaluating and understanding your credit score, visit www.myfico.com.
Lender Checklist: What you need for a Lender
W-2 forms — or business tax return forms if you're self-employed — for the last two or three years for every person signing the loan.
Copies of at least one pay stub for each person signing the loan.
Account numbers of all your credit cards and the amounts for any outstanding balances.
Copies of two to four months of bank or credit union statements for both checking and savings accounts.
Lender, loan number, and amount owed on other installment loans, such as student
loans and car loans.
Addresses where you’ve lived for the last five to seven years, with names of landlords if appropriate.
Copies of brokerage account statements for two to four months, as well as a list of any other
major assets of value, such as a boat, RV, or stocks or bonds not held in a brokerage account.
Copies of your most recent 401(k) or other retirement account statement.
Documentation to verify additional income, such as child support or a pension.
Copies of personal tax forms for the last two to three years.
Get Your Finances in Order:To-Do List
1. Develop a household budget. Instead of creating a budget of what you’d like to
spend, use receipts to create a budget that reflects your actual spending habits over the last several months. This approach will
factor in unexpected expenses, such as car repairs, as well as predictable costs such as rent, utility bills, and groceries.
2. Reduce
your debt. Lenders generally look for a total debt load of no more than 36 percent of income. This figure includes your mortgage,
which typically ranges between 25 and 28 percent of your net household income. So you need to get monthly payments on the rest of
your installment debt — car loans, student loans, and revolving balances on credit cards — down to between 8 and 10 percent of your
net monthly income.
3. Look for ways to save. You probably know how much you spend on rent and utilities, but little expenses add
up, too. Try writing down everything you spend for one month. You’ll probably spot some great ways to save, whether it’s cutting out
that morning trip to Starbucks or eating dinner at home more often.
4. Increase your income. Now’s the time to ask for a raise! If
that’s not an option, you may want to consider taking on a second job to get your income at a level high enough to qualify for the
home you want.
5. Save for a down payment. Designate a certain amount of money each month to put away in your savings account. Although
it’s possible to get a mortgage with only 5 percent down, or even less, you can usually get a better rate if you put down a larger
percentage of the total purchase. Aim for a 20 percent down payment.
6. Keep your job. While you don’t need to be in the same job
forever to qualify for a home loan, having a job for less than two years may mean you have to pay a higher interest rate.
7. Establish
a good credit history. Get a credit card and make payments by the due date. Do the same for all your other bills, too. Pay off the
entire balance promptly.
