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Know your score before buying a home

Your credit score will help determine the terms and rate of your loan.

By WASHINGTON POST
Published January 28, 2007

If you're thinking of buying a house, there's one number that's more important than all the others.

It's not your salary. It's not your savings account balance. It's not even the price of the house.

It's your credit score.

In just three digits, that score tells lenders just about everything they say they need to know about how likely a person is to pay back a mortgage loan in a timely manner. The more risk potential home buyers pose, the less likely they are to get a loan with the lowest possible interest rate and the best terms. It's the rare lender who looks only at a credit score, but a low score will put you in a bad position.

"Many people don't know where they stand and they don't know that they can improve their standing," said John Ulzheimer, the group's president.

Credit cards open several years with an excellent record of on-time payments help assure lenders that you will not fall behind on house payments.

"We as lenders want evidence that you have been (dealing) with creditors for a substantial amount of time so we can see that you are capable of repaying debt," said Connie Echeverria of Prosperity Mortgage, an affiliate of Wells Fargo Home Mortgage.

Many home buyers rush to close longtime accounts in good standing before applying for a mortgage, which weakens their credit scores. What hurts is having maxed-out credit cards.

Science is what helped shape the credit-scoring business into what it is today. The nation's most widely used scoring formula, called FICO, was developed by Fair Isaac Corp. and became commercially available in 1989.

The nation's three largest credit reporting agencies - Equifax, TransUnion and Experian - use FICO software to calculate credit scores.

Standard FICO scores range from 300 to 850. The median is 723, meaning half of consumers score better and half score worse. The higher the number, the stronger the rating.

In FICO's estimation, whether someone pays their bills on time is such a good predictor of creditworthiness that payment history makes up 35 percent of a FICO score. That's followed by the amount owed, the length of credit history, the types of credit involved and new credit opened.

About credit scores

Standard FICO scores range from 300 to 850. The median is 723, meaning half of consumers score better and half score worse. The higher the number, the stronger the rating.

About access to them

Federal law allows consumers to access their reports with each one of the major credit bureaus free once a year by logging on to www.annualcreditreport.com. For a few extra dollars, the bureaus also calculate scores for those who ask, though not all of them sell the FICO brand. Here are tips on what to do when your report arrives:

- Review it closely. Look for errors and possible fraud, such as identity theft. Credit bureaus can fix these problems if you have the records to back up your claims. You may also discover that positive information that could raise your score has been omitted - for instance, the payment record or credit limit on one of your credit cards.

- Ask for an investigation. By law, if you find what you think is an error, the credit bureau must investigate the matter (generally within 30 days) and provide the person affected with the written results within five days, according to Freddie Mac, which has created a credit education curriculum called CreditSmart that several groups use to educate the public.

[Last modified January 27, 2007, 22:26:33]