Mortgage Credit Score - How Credit Bureaus Calculate Your Score

Your mortgage credit score is the most influential determinant of loan approval. Credit score calculators for each bureau spit out a number or score between 300 and 850 derived by analyzing your past payment history with an eye to your present-day lending risk.

Each of the three repositories has it’s own calculation and therefore we get an Equifax credit score, an Experian credit score, and a Transunion credit score. The mortgage credit score calculated by each agency are highly accurate as a predictor of credit risk.

A credit bureau is a company that receives payment information, current balances, dates, and open amounts from the lenders or credit card companies you make payments to. It costs the company money to report histories, so some choose not to.

Your electric bill, phone bill, gas bill, rent, etc. are examples of payment histories that are typically not reported to credit bureaus. Things like car payments, credit card payments, mortgage payments, or any other loan from a bank or credit union usually do get reported to the credit bureaus.

How important is credit when getting a mortgage?

It’s basically the first thing looked at when considering you for a mortgage. Lenders have to know how well you pay your debts. You could have all things positive to getting approved like assets, large down payment, good job but if you have never demonstrated how you pay on credit, that is a problem.

Also, lenders want the accounts you are paying on to be established. Lenders have to have a certain amount of open accounts that have been opened for 12-24 months. If you plan on buying a house and you have never utilized credit, go out and get some accounts right away.

I know it is really backwards… Credit is bad right?

Paying interest on credit cards is stupid but unfortunately it is the only way you can show the lender you are worthy of getting a mortgage. You have to actually use the account too.

Here is the best way to do that:

1.Open 3 credit card accounts.
2.Charge no more than 50% of the credit limit on each card.
3.Pay more than the minimum payment every month and
4.For gosh sakes….don’t ever pay late!

That will ensure you a fantastic credit score in 12-24 months.

How are the credit scores calculated?

Each repository has a “propreity algorhtym” meaning a secret formula for calculating their credit score. So we’ll never be “told” how credit scores are calculated but we make an educated guess.

Factors most likely effecting your credit score

1.The most important criteria is payment history. If you make all your payments on time, you will have a high credit score.

2.The amount of credit is another factor. If you have a credit card with a $5,000 credit limit and your balance you carry on the card is $5,000, then your credit score will be lower because of that. It shows you may be in trouble if you used all your available credit.

3.Yet another is the amount of time you have had the accounts. If you have credit cards you just opened the computer may also think you are in some sort of financial trouble that you had to use credit to stave off.

4.Another is the amount of credit cards you have. If you have applied for and received every card offer that comes in your mailbox or you get every card when told at the checkout “you can save an additional 10% is you apply for our credit card today”, then you have too many credit lines open. Again, the credit score formula looks at that like trouble waiting to happen.

5. Lastly, another factor is how many companies pulled your credit in the last 12 months. If several companies pull your credit then to the computer it looks like you are getting ready to go on a spending spree and it will lower your scores.

What happens if there is a mistake on your credit report?

The computer and underwriter take what the credit report gives them when you are trying to get approved for a mortgage. You won’t be able to tell them otherwise unless you have documentation to prove what you are saying is true and the credit report is wrong. If you have that and the underwriter accepts it then your next step is to contact each credit repository and get that information to them to correct on there records. If you don’t, it will just keep reporting incorrectly and haunt you forever.

The three different repositories are:

1. Experian P.O. Box 2002 Allen, TX 75013 888-397-3742

2. TransUnion P.O. Box 1000 Chester, PA 19022 800-888-4213

3. Equifax P.O. Box 740241 Atlanta, GA 30374 800-685-1111

Know your score:

Good Luck!

Best Credit Cards

Author: Rob K. Blake
Published November 30, 2007

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