When I started in the business in 1987, the guidelines were simple. Prove you made your payments on your obligations on time for the previous 24 months without going 30 days or more past due. There was no scoring back then. On government loans like FHA and VA, you had to have a good payment history for 12 months, and they allowed maybe a couple of dings going back 24.
The scoring models of today are basically designed to attempt to create the same picture as before. In the lenders eyes, if cannot make a $25 charge card payment on time and let it go 30 days late recently, how can you justify making a house payment on time when it is a lot larger? The credit score algorithms are designed to calculate the probability of on time payments. Many factors go into the score:
- payment history (30,60,90 day lates)
- age of accounts (how far back since account was opened)
- percentage used versus credit available (30% used gets best scoring)
- collections (paid versus outstanding and what for?)
- past dues (currently not paid on time and still owing - this is bad)
- judgements (someone sued you and won - this usually has to be paid off before mortgage)
- types of accounts (revolving, installment, mortgage, high interest finance accounts)
- amount of different accounts (how many total open trade lines or accounts you have)
Now here is a new problem. In a recently published report, a claim was made that approximately 70% of ALL credit reports contain errors. Many of these errors were affecting the credit score. This could potentially mean thousands of dollars extra spent on mortgages.
Just a couple of years ago, a 620 score could get a person the best rates. Now the new figure is 740. On conventional conforming loans, extra fees are placed on scores between 620 and 740. Coming on the horizon now is a move to have a minimum score above of 620 on government backed mortgages like FHA, VA, and USDA loans. even senior reverse mortgages where NO credit is used, some lenders are now requiring a credit score. Go figure!
I highly suggest if you are deciding to obtain a new mortgage, get with a mortgage professional experience in reviewing your credit and able to guide and suggest options for credit restoration if needed. More information can be obtained by visiting my website at http://www.cme4loans.com/DisputingCreditReports or give me a call.
