Mortgage Refinance Guide

If you are considering mortgage refinancing it is well worth your time to review your credit before you contact lenders. Your credit scores influences not only the type of mortgage products you will qualify, but how much each loan will cost you. Before applying for a new mortgage it is important to review your credit records for errors…this will save you a good deal of time and frustration down the road. Here are the basics you’ll need to know about your credit score before refinancing your home mortgage loan.

What Are Credit Scores?

Your credit score is one of the major factors determining the type and amount of mortgage you will qualify when refinancing. Your credit score is a snapshot of the contents of your credit reports and is intended to provide a numerical estimate of your ability to manage personal finances. Your credit score is based on the following aspects of your credit reports:

1. Your history of making on-time payments.
2. How much available credit you have.
3. Reports made by your creditors.
4. Negative information including judgments, leans, or bankruptcy.

Keep in mind that because you have three credit reports you’ll have three corresponding credit scores. Credit records are maintained by three for-profit companies: Equifax, Experian, and Trans Union. These credit bureaus use complicated and secretive algorithms for distilling the contents of your credit files into a numerical representation of your likelihood to repay your mortgage in a timely manner. Credit scores range from 300 to 850; the higher your credit score the less you’ll pay for refinancing your mortgage loan.

How Are Credit Scores Calculated?

Understanding how your credit score is calculated is the first step to improving your credit and qualifying for the best mortgage rate possible. If your credit score needs improvement concentrating on the following areas will allow you to make the most significant improvements in the least amount of time.

35 Percent of your credit score is based on your history of making payments on time. Making all of your payments on time, especially your mortgage payment will have the largest impact on improving your credit score. Even if you make only one late payment prior to applying for a mortgage it could have a significant negative impact on your credit and the mortgage rate you will qualify.

30 Percent of your credit score is based on the amount of outstanding debt you have. The amount of credit you have used measured against your total credit available or the limits on each of the accounts listed on your credit reports represents your available credit. Maxing out your credit cards has a large negative impact on your credit score. Many financial advisors agree that maintaining no less than 25% of your available credit will have the largest favorable impact on your credit score.

15 Percent of your credit score is based on the amount of time that you’ve been using credit. The longer your credit history of favorable reporting, the higher your score will be. Your credit reports are the record of your use of credit so it is important to ensure that your credit records are error free on a yearly basis.

10 Percent of your credit score is based on the number of creditors making inquiries into your credit reports. An inquiry is made before applying for new credit and having too many flags you as a risk to potential lenders. Most inquires made stay in your credit files for a period of one year before dropping off. Because inquires have a negative impact on your credit score it is important to limit them while shopping for a mortgage loan. Accessing your own credit report does not count as an inquiry and does not have a negative impact on your credit score.

10 Percent of your remaining credit score is based on the different types of credit you use. This includes revolving accounts like your credit cards and installment accounts like your car loan and mortgage. Your mortgage payment history is an important aspect of your credit score and you should always strive to make the payments timely.

What Is The Ideal Credit Score?

If you are a homeowner with a credit score below 500 you can still qualify for a mortgage; however, you’re going to pay a lot more and be forced to accept less favorable terms. If your credit score is above 700 you will qualify for the best mortgage programs with the lowest interest rates. You can learn more about improving your credit score prior to refinancing your mortgage with a free video tutorial and wholesale mortgage rate quote.

Before applying to refinance your home mortgage loan it is important to take stock of your credit reports and check for any inaccuracies. Your credit score is derived from your credit reports and any inaccurate or negative information will have a significant impact on your FICO score and the mortgage rate you will qualify. Here are several tips to help improve your credit score prior to mortgage refinancing.

Improving your credit score is a long term endeavor; there are no quick fixes for financial problems. There are however a number of habits you can develop which will improve your FICO score and get you a lower mortgage rate.

Make All of Your Payments on Time

Your credit score is complex calculation made up of a number of factors; however, 35% of this score is based on your payment history. Paying all of your bills on time is the best thing you can do to improve your credit score.

Pay Down Your Credit Cards

Paying down the balances on your credit cards will also help improve your credit score prior to mortgage refinancing. The amount you owe accounts for 30% of your credit score. Avoid maxing out your credit cards, making large purchases, or opening new lines of credit prior to refinancing your mortgage.

You can learn more about improving your credit score before applying for a new mortgage, including costly mistakes to avoid with our free mortgage tutorial.

Your credit scores are numbers derived from your history of consumer credit. Mortgage lenders use your credit score to determine how likely you are to default on your mortgage loan. Homeowners with high credit scores get better mortgage interest rates than those with low credit scores.

Credit scoring has been around for years; however, computer generated scores have replaced manually generated scores. Credit scores have been widely used for instant approval on credit cards but are relatively new for approving mortgage loans. The most common credit score in use today the FICO score, which is generated by the Fair Isaac Corporation. FICO is the credit score used by the three major credit agencies Experian, Equifax, and Trans Union.

While all three credit reporting agencies use FICO’s scoring, they almost always come up with different scores based on the contents of their own records. Credit scores vary from one agency to the next because they pull credit activity from different parts of the country and collect different information. FICO credit scores range from 300 to 850. You’ll probably never see a credit score higher than 810. Anyone with a credit score higher than 720 is generally considered to have excellent credit. Good credit scores start in the neighborhood of 620 and a FICO score below that is considered to be poor.

How is your credit score generated? Fair Isaac looks at your credit reports and assigns your credit score based on several factors. Your history of making payments on time accounts for 35 percent of your credit score. The amount of outstanding debt you carry determines 30 percent of your score, and the amount of available credit you have factors into the remaining calculation. Available credit is viewed as the “potential for debt” and can have a detrimental affect on your credit score.

How does your credit score affect your mortgage interest rate? You can learn this and strategies for boosting your credit score in the video segment titled “Your Mortgage & Your Credit.” Register for our free mortgage tutorial to learn more.