Your credit score is a useful tool for your lender when it comes to deciding if you are eligible for a specific type of loan. It is a quantitative figure that expresses your lending eligibility. If you know a person’s credit score is very low (generally anything less that 600 is considered low), you already know they are a high-risk borrower who may not repay the loan, even without looking at their credit report. In the mortgage industry, lenders set specific score standards for various types of loans. For instance, most borrowers seeking a traditional loan must have a credit score that is 640 or higher. However, the standard for an FHA loan may be only 580.
The score is calculated by weighing certain information in your credit report. The amount of outstanding debt you have accounts for 30% of the score, for instance. Other weighed factors include timely payments and past extensions of credit, length of time you’ve held credit accounts, the types of credit accounts, and how many accounts you have opened.
Other forms of data that may be used to calculate a score include how often your address has changed, or other public and private personal information. The credit score ultimately provides a baseline by which the underwriter can be guided when evaluating a borrower. The score you have will affect the types of loans you are eligible for and determine which loan programs you may participate in.
However, your credit score is not the only factor that will be considered. Your loan officer should never disqualify you automatically based only on your credit score. It is also possible to improve a score, namely by addressing possible errors.
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