How Much Of Your Monthly Income Goes Towards Paying Off Your Debts
This is called your debt-to-income ratio, and itâs expressed as a percentage.
Letâs say you earn Â£2,000 a month. Â£500 goes towards paying credit accounts like your phone bill, car loan and credit card. Your debt-to-income ratio is 25%.
Your lender will expect you to have enough money available each month to cover your mortgage repayment. Looking at your current financial commitments relative to your income helps them work out how much more you could set aside without getting into trouble.
Before you apply
Every lender has their own policy on whatâs an acceptable debt-to-income ratio. That said, you wonât be surprised to hear that, the lower it is, the better. A lower debt-to-income ratio shows lenders you have enough money to afford your monthly repayment.
For this reason, itâs worth trying to pay off as much of your debt as possible before applying. Here are a few tips:
If you have large debts, such as a car loan, use part of your savings to clear them
Alternatively, consider increasing your monthly repayments. This will temporarily raise your debt-to-income ratio, but itâll help you clear the debt sooner
If possible, postpone larger purchases until after youâve cleared your debts
What Does A Tri
A tri-merge credit report includes key financial information about you. This includes a list of your open credit card accounts and how much you owe on them. It also lists your open loan accounts including mortgage, personal, student and car loans and the balances on them.
A tri-merge report will also list any late payments youve made on these accounts during the last seven years. A payment is reported as late if youve made it 30 days or more past your due date.
Other negative financial information is included in these reports, including bankruptcy filings youve made in the last 7 or 10 years and foreclosures youve suffered in the last 7 years.
The more negative information in the reports, the less likely lenders are to approve you for a mortgage. Lenders dont want to see high balances on your credit card accounts or late payments on any of your accounts.
One thing this report wont include? Your . Thats because credit scores are never included in credit reports. The most important credit score, the FICO® Score, is maintained and created by the Fair Isaac Company. This company says that more than 90% of lenders use FICO® Scores when making lending decisions. Lenders will pull this score when you apply for a mortgage, but it wont be included in either your individual credit reports or your tri-merge credit report.
How Your Fico Score Is Calculated
FICO® is a California-based company that tabulates the namesake consumer credit score using five key pieces of credit data to determine your score. The factors that affect the outcome of your score include your payment history, the amount owed on existing accounts, the length of your credit history, any new credit accounts and the types of credit in the mix.
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What You Can Do
Before applying for a mortgage, get copies of your reports and read them carefully to determine if there are any errors. If you find inaccurate information, you have the right to dispute each item with the credit bureaus and ask to have it removed from your reports.
You should also obtain your FICO credit scores to determine what range theyre in. If your scores are lower than expected, you can take steps to improve them before you submit your mortgage application.
Improve Your Credit Scores Before Applying
The FICO® Score versions used in mortgage lending and the more recently released versions, such as FICO® Score 9 and 10, have the same 300 to 850 range. VantageScore, a competing maker of credit scores, also uses that range for its latest VantageScore 3.0 and 4.0 model credit scores.
For all these scoring models, which use the information from one of your credit reports to determine your score, a higher score is better. As a result, you may notice similar trends in all your scores. This is why making on-time payments can help raise all your credit scores, while missing payments could hurt all your scores.
However, there are also differences between the scoring models. For example, the latest FICO® and VantageScore models ignore paid collection accounts and give less weight to medical collection accounts. But the older FICO® Score models continue to count collection accounts against you after you pay off the balance.
In general, whether you’re looking to buy a home or take out a different type of credit, there are a few things that can help improve all your scores:
- Pay your bills on time.
- Pay down credit card balances.
- Don’t apply for other types of credit in the months leading up to your mortgage application.
In addition to getting your application, you want to get your finances in order as well. Saving up for a larger down payment, increasing your income and paying off debts may all help you qualify for a mortgage with better terms.
How Your Credit Scores Are Made And Why They Matter
Since there are few numbers that matter as much to your financial wellbeing as your credit score, it helps to know what your scores mean and how they work.
First, know that theres a big difference between a credit report and a credit score.
- Your credit report is a record of your borrowing history Each loan or line of credit youve opened, dates on those accounts, payment history , and so on. Overall, it shows how reliably you manage and pay back your debts
- Your credit score sums up your credit report in a single number It weighs every item on your credit report to come up with an overall score that sums up how responsible of a borrower you are
The big three credit bureaus Equifax, Transunion, and Experian operate in the realm of credit reporting.
Each one keeps a separate record of your borrowing history, based on the information your creditors send them.
The other players in the game FICO and VantageScore are responsible for credit scoring. They determine your score based on whats included in those credit reports.
For example, keeping your credit utilization ratio low can help your credit scores, while repeatedly neglecting to pay your credit card bills on time can hurt them.
Length Of Credit History
of your FICO score calculation. The longer youve had credit accounts reporting to the major credit bureaus, the better.
How to maximize length of credit history
As indicated in the category above, never close open accounts just because they have no balance or you do not actively use them. Those aged and zero balance accounts still have benefit to you because they will continue counting in your length of credit history as older/aged accounts.
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What If You Don’t Have A High Enough Credit Score To Buy A House
Having bad credit or no credit may mean youre unlikely to get a mortgage unless someone you know is willing to help out. Having a co-signer who has a better credit score could help you secure the loan.
Another option would be to have “a friend or more likely a family member purchase the home,” add you to the title and then try to refinance into your name when your credit scores improve sufficiently, according to Ted Rood, a mortgage banker in St. Louis.
If such assistance isnt available to you, your best bet will be waiting and working on your credit.
How Do My Fico Scores Affect My Ability To Get A Mortgage
Lending a huge amount of money is risky business. Thats why mortgage lenders need a good way to quantify the risk, and your FICO® scores with all of the data and research that go into them fit the bill.
Different lenders have different requirements for their loans. And because there are many different types of mortgages from many different types of lenders, theres no one single minimum FICO® score requirement.
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Basics Of Credit Scores
When you apply for a mortgage, lenders consider your credit score to assess whether you’re a risk for a mortgage. They can obtain your credit report from three bureaus Experian, TransUnion and Equifax. With your credit reports in hand, lenders can use credit scoring models such as the FICO credit score or VantageScore.
Both models take into account factors such as your on-time payment history, number of inquiries, type and number of accounts and length of credit history to generate a number from 300 to 850. Generally, a score of 680 or higher will indicate good credit, while a score in the upper 700s or higher would be excellent.
Depending on the bureau from which the lender pulls your residential mortgage credit report, you’ll find that a FICO or VantageScore number derived from one source can differ from that of another bureau. This is due to the fact that some creditors may not report your accounts or credit pulls to all the bureaus. So, it’s possible that your FICO score calculated from Experian’s report is lower than the one from TransUnion’s.
What If No Score Is Available
In some situations, an applicant may not have a usable FICO score from one of the three credit bureaus. In that case, the mortgage lender will simply use the lower of the two scores that are available. And if two scores are not usable, they will use the one remaining score.
And since you may be wondering, if a mortgage applicant has no usable FICO scores, generally they wont qualify for a mortgage. I say generally because there are exceptions. If you fall into this category, contact a mortgage broker to see what options you have.
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Fico 8 Vs Fico : What Are The Differences
FICO 9 is similar to FICO 8 but differs when it comes to collections and rent payments. FICO 9 counts medical collections less harshly than other accounts in collections, so a surgery bill in collections will have less of an impact on your than a credit card bill in collections.
Additionally, FICO 9 ignores accounts in collections that have a zero dollar balance. If you had a credit card account go to collections but later paid it off, FICO 9 will no longer use said collections account against your score. This is different than FICO 8, which factors all collections amounts of $100 or more into your FICO scoreeven if theyre completely paid off.
Just because collections with a zero balance are ignored by FICO 9 does not mean that lenders will ignore them. Credit bureaus will still show these collections on your full credit report, and lenders will see them when they reviews your full credit history.
Finally, FICO 9 factors rental history into your credit score. This makes it easier for people with no credit to build a high credit score with their monthly on-time rent payments. Unfortunately, this is dependent on your landlord actually reporting rent payments to credit bureaussomething not yet seen on a large scale.
Borrower Credit Scores: 650680720
For example, if your credit scores are 650, 680, and 720, a mortgage lender would use the 680 score, which is a decent but below-average credit score.
You basically dont get for the 720 score, though they throw out the 650 score as well.
Alternatively, if you had scores of 710, 720, and 730, theyd use the 720 score and youd be in much better shape.
*If you only have two credit scores, lenders will use the lower of the two for qualifying purposes.
If you only have one, they will use that one, though not all lenders approve borrowers with a single credit score, aka limited credit history.
Tip: It might be possible to get approved for a mortgage without a credit score, but not all lenders are willing to extend such financing.
Additionally, stricter requirements will accompany such approvals, including higher minimum down payments and lower maximum loan amounts.
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The Credit Scores Lenders Use
The score you pulled from the or another third-party provider was an educational credit score, provided just to give you a perspective on your credit standing. Theyre not the scores that lenders actually use to approve your application. Services that provide credit scores include this information in their disclaimers.
On top of that, you likely purchased a generic credit score that covers a range of credit products. Creditors and lenders use more specific industry credit scores customized for the type of credit product youre applying for. For example, auto lenders typically use a credit score that better predicts the likelihood that you would default on an auto loan. Mortgage lenders use a score developed specifically for mortgage loans. Your lender also might also use a proprietary credit score thats developed for use by just that company.
Many lenders use the FICO score, but even the score you receive through myFICO may be different from what your lender sees. Some lenders also use VantageScore, but again, their version is different from yours.
The score the lender pulls might differ from the one you used sometimes by several points, possibly enough to disqualify you from the best interest rate or maybe enough to have your application denied. When you order your credit report and score from myFICO, you’ll receive access to the most widely used FICO industry scores. This will give the best idea of what the lender sees when they check your credit score.
Why Scores Are Different
You might think that all three credit scores, even if different, would be very close. Not so. There can be differences as large as 50 to 75 points, higher or lower. For example, two bureaus might report scores of 685 and 700, yet the third might show 635. You read the credit report and learn that the third bureau shows an unpaid IRS tax lien, while the others do not. Whether true or erroneous, this entry depresses one score, but has no effect on the other two.
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Preparing Your Credit For A Mortgage
If youre planning to purchase a home or refinance your mortgage, its smart to keep a close eye on your credit reports and credit scores. You can purchase the same FICO scores used by mortgage lenders at FICOs website, myFICO.com.
You can also monitor the health of your credit reports, which are the sole basis of all of your credit scores, at no cost. Federal law gives you the right to claim a free copy of your three credit reports once every 12 months at AnnualCreditReport.com.
However, through April 2021, you can access a free copy of your three reports once a week on the same website. This move was announced by the three credit bureaus in in response to the COVID-19 pandemic.
These free weekly credit reports dont include your credit scores, but they will show you the information upon which your credit scores are based.
Logic Of Using The Middle Score
Mortgage lenders understand that credit bureau information is not as consistent or identical as it should be. Like figure skating judges at the Olympics, they “throw out” the high and low scores, and use the middle score as the most representative reflection of your credit standing. The logic is sound the credit bureau data, often, is not. This reality reinforces the advice to examine your three credit reports at least once per year to ensure that harmful, erroneous data is not present.
How To Monitor Your Credit Reports
Since the mortgage industry looks at all three credit reports and scores, you may want to consider a paid credit monitoring service that pulls more comprehensive data than a free version would.
The best credit monitoring services offer triple-bureau protection, looking at your information across all three .
Experian IdentityWorks Premium monitors all three of your reports to make you aware of activity including score changes, new inquiries and accounts opened in your name, changes to your personal information and suspicious activity detected. Plus, youll regularly receive updates to your FICO Score.
$9.99 to $29.99 per month
Experian for Plus plan or Experian, Equifax and TransUnion for Premium plan
Where Can You Find The Information In Your Tri
While you might not be able to get your hands on your actual tri-merge credit report, you can access the information found in the report on your own.
Using free or paid credit monitoring services, you can regularly check your credit scores from the major bureaus.
Many of these services only monitor one or two of your credit scores.
Though, note that youll probably pay more for a service that reports all three scores.
You can also access your scores from Experian, Equifax, and TransUnion once a year without doing any damage to your credit score or paying a fee.
Thanks to the Fair Credit Report Act, you can see all three scores once every twelve months at annualcreditreport.com.
If you need to access your full report more than once a year, youll have to pay to access the information.
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How Many Points Does A Mortgage Raise Your Credit Score
When you apply for a mortgage, your credit score will drop slightly however, the impact is minimal. According to MyFICO.com, an inquiry lowers most scores by less than five points. If you shopped around for the best rate by getting quotes from several lenders, you will not get dinged for each inquiry.