alt="Remember"/> Your credit score determines not only whether you qualify for a loan but also how much you’re qualified to borrow and at what interest rate. A high credit score lets you borrow more and pay less interest on it. A high score can also lower your home insurance, auto insurance, and life insurance rates.
CREDIT SCORE STATS
Credit reporting agencies rely on one or more statistical models to determine your credit score. One of the most popular models is the Fair Isaac Company (FICO) rating system. The credit company assigns numerical values to particular pieces of data in your credit history, such as the length of your credit history and the various types of interest you’re paying. They then plug these numbers into the statistical model, which spits out your credit score. It’s basically a numbers game that weighs the data on your credit report in the following manner:
35 percent of the score is based on payment history.
30 percent is based on outstanding debt or how much you currently owe.
15 percent is based on the length of your credit history or how long you’ve been borrowing.
10 percent is based on recent inquiries on your report (whenever a lending institution requests a report).
10 percent is based on the types of credit, such as mortgage or credit card interest.
Cranking up your credit score
If you have a credit score of 700 or higher, pat yourself on the back. You’re above average and certainly qualified to borrow big bucks at the lowest available rates. Anything below about 680 sounds the warning sirens. This number is the point at which lending institutions get out their magnifying glasses and begin raising rates and denying credit. If your credit rating dips below 700, take steps to improve it, such as these:
Dispute any erroneous items on your credit report. Disputing a claim doesn’t always result in a correction, but you can request to have a paragraph explaining your side of the story added to your report.
Apply for fewer loans and credit cards. When you apply for a loan or credit card, the lending institution typically orders an inquiry that shows up on your credit report. Evidence that you’re applying for several loans or credit cards in a short period of time can make you appear financially desperate.
Pay off your credit card balances or at least pay off enough so that the balance is 50 percent or below your available credit limit. If you have enough equity in your home, you can refinance to consolidate high-interest credit card bills into your mortgage payment, but avoid the temptation to begin racking up more credit card debt after refinancing.
Avoiding mistakes that can sabotage your loan approval
After you apply for a loan, resist the urge to make any life-changing decisions that negatively affect your current financial status. Major changes can undermine your efforts to secure a loan. When you’re applying for a loan, follow the advice of our friend and colleague, loan officer Marc Edelstein, with his Ten Commandments When Applying for a Mortgage Loan:
1 Thou shalt not change jobs, become self-employed, or quit your job.
2 Thou shalt not buy a car, truck, or van (or you may be living in it)!
3 Thou shalt not use charge cards excessively or let your accounts fall behind.
4 Thou shalt not spend money you have set aside for closing.
5 Thou shalt not omit debts or liabilities from your loan application.
6 Thou shalt not buy furniture, an entertainment center, a boat, or a big-screen TV.
7 Thou shalt not originate any inquiries into your credit (for example, by applying for a new credit card).
8 Thou shalt not make large deposits without first checking with your loan officer.
9 Thou shalt not change bank accounts.
10 Thou shalt not cosign a loan for anyone.
To simplify the loan process, supply your lender with copies of your last three bank statements and last three federal tax returns.
Comparing loans
The best way to compare loans is to determine the total cost of the loan over the life of the loan:
1 Start with the amount the bank charges you upfront in loan origination fees, discount points (interest you pay upfront — typically, a percentage of the loan, to lower the interest rate), and other fees.
2 Multiply the monthly payment times the number of months you plan to pay on the loan.
3 Add the two amounts to determine your total payment.
4 Total the amount of each payment that goes toward paying the principal of the loan. (Your lender can tell you how much of each payment goes toward principal.)
5 Subtract the total you determined in Step 4 from the total in Step 3.
Suppose you’re considering two loans, each for $100,000. You plan on using the loan to buy and renovate a home over two years and then sell it and pay off the remaining principal on the loan. You have a choice between a 30-year, traditional fixed-rate mortgage at 6 percent and a 30-year, interest-only loan at 5 percent. Look at the 6 percent, fixed-rate mortgage first:
| Loan origination fee and discount points: | $1,000.00 |
| Plus monthly payment of $599.55 multiplied by 24 months: | $14,389.200 |
| Equals total payment: | $15,389.20 |
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Minus total
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