Your credit score:

Your Credit Score:
What It Means To You as a Prospective Home Buyer
By Joe New with Cendera Funding
The Five Factors of Credit Scoring
Credit Scores are comprised of five factors. Points are awarded for each component, and a high score is most favorable. The factors are listed below in order of importance.

1. PAYMENT HISTORY – 35%
Paying debt on time and in full has the greatest positive impact on your credit score. Late payments, judgments and charge-offs all have a negative impact. Missing a high payment will have a more severe impact than missing a low payment, and delinquencies that have occurred in the last two years carry more weight than older items.

2. OUTSTANDING CREDIT BALANCES – 30% IMPACT
This factor marks the ratio between the outstanding balance and available credit. Ideally, the consumer should make an effort to keep balances as close to zero as possible, and definitely below 30% of the available credit limit when trying to purchase a home.

3. CREDIT HISTORY – 15% IMPACT
This portion of the credit score indicates the length of time since a particular credit line was established. A seasoned borrower will always be stronger in this area.

4. TYPE OF CREDIT – 15% IMPACT
A mix of auto loans, credit cards and mortgages is more positive than a concentration of debt from credit cards only.

5. INQUIRIES – 10% IMPACT
This percentage of the credit score quantifies the number of inquiries made on a consumer’s credit within a six-month period. Each hard inquiry can cost from two to 25 points on a credit score, but the maximum number of inquiries that will reduce the score is ten. In other words, 11 or more inquiries within a six-month period will have no further impact on the borrower’s credit score. Note that if you run a credit report on yourself, it will have no effect on your score.
Remember that the credit score is a computerized calculation. Personal factors are not taken into consideration when a credit report is generated. It is merely a snapshot of today’s credit profile for any given borrower, and it can fluctuate dramatically within the course of a week.
How Does A Low Credit Score Affect My Interest Rate?
Lenders estimate your ability to pay back money based on your credit score. The risk factor they take on is built-in to your interest rate as a financing fee. Therefore, a low credit score results in a higher interest rate, higher monthly fees, and a higher amount of interest being paid over the total life of the loan.

A borrower with a credit score of 620 would be questionable to an underwriter. While the lender may agree to provide financing, the increased interest rate is factored into the monthly payment. The following chart illustrates the difference in the amount of interest paid over the life of the same loan with three different credit score scenarios.

A borrower who increases his or her credit score from 620 to 720+ can potentially save $601 per month on mortgage payments, $7,214 per year, and approximately $216,432 over the life of the 30-year loan.

30-Year Fixed Rate with a Principal Loan Amount of $250,000

FICO SCORE APR MONTHLY PAYMENT INTEREST PAID
Above 720 5.71% $1,453 $272,928
620-719 5.76-7.84% $1,466 - $1,807 $277,845 to $400,381
Below 620 8.45%-9.23% $1,914 - $2,054 $438,957 to $489,365