How Credit Scores Work Within a Mortgage Application

by Mark Johnston

Home buyers who are seeking a mortgage find out early on that their credit scoring plays an important part in the home buying process. A mortgage credit score is an automated technique used by lenders to decide whether or not to offer a mortgage.

Many responsible lenders want to know that their borrowers can comfortably afford to manage any new borrowing.

Many borrowers therefore find that applying for a mortgage has overtones of ‘judgement day’.

Lenders assess borrower’s ability to afford a loan firstly by their application form, this gives then access to data such as salary, how long in employment, how many dependents there are and also whether they already own a property.

After the lender is satisfied with the information on the application form they will turn to the potential borrower’s credit report, this is usually provided by major credit bureaus such as Experian and Equifax.

A the credit report includes information of all a borrowers credit accounts, repayment history, recent applications for credit (checking to see if borrowers are attempting to open numerous new accounts), whether payments have been missed and even whether they are registered to vote.

The following are an approximate example of which parts of the credit history are most important:

35%-payment history

30%-amounts owed

15%-length of credit history

10%-types of credit

10%-new credit

Lenders use a credit report by allocating a value to items in the report then they ‘plug’ data from the credit report in to software which analyses it and then produces a number, this number is then used to estimate risk. However lenders use different formulas when calculating scores.

Credit scores are also referred to as FICO scores, which is just the name of the software used to create the score-Fair Isaac Corporation.

Credit scores are usually between 0 and 1,000. A high score means that borrowers are low risk of defaulting on payments. Borrowers with a score above 700 are typically offered more financial options and better interest rates.

However the credit score is not set in stone, in fact it is usually different every time you apply for credit, as every lender uses a different formula which can vary according to the type of credit a borrower is applying for., they can change over time and also as your circumstances change so does your credit score.

The key to a good credit rating is that the credit report is up to date and accurately reflects a borrower’s current circumstance.

Borrowers can check their own credit report in advance, thus allowing them to make sure it is as up to date as possible by challenging entries that are incorrect and also setting the record straight by adding an explanation if special circumstances account for a problem on the report, such as if once some repayments were missed due to an illness but they have never missed before or since, a note ca be added and lenders may take this in to account.

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