A credit score is simply a number calculated based on the borrower’s credit history. The borrower gets points based on information in his or her credit report. These points are compared to those of other similar consumers and help the lending agency identify the risk of loaning money to the person or entity.
Based on these numbers, the lending agency can predict how likely the borrower is to repay the money. The higher the score, the more likely the borrower will pay timely. These numbers range from a low of 300 to a high of 900. Knowing the score helps bankers decide what type of rate to charge the borrowers, whether it is an auto loan, credit card, or mortgage loan.
This score is commonly known as a FICO score. And although the exact formula is not widely known or readily defined, here is an approximate breakdown of factors that help determine the scoring:
- Payment History – 35 percent. This history will include on- time payments, late payments, collections, bankruptcy and so forth. The more recent the events, the more points, both positive and negative, the more it affects the score.
- Outstanding Debt – 30 percent. The existing balance versus the original balance on cards, car loans and mortgages affect the score dramatically. Thus, if the balances are all very high versus the limit, typically the scores will lower.
- Length of Credit History – 15 percent. Newer borrowers do not have a long history and that will work against them when it comes to the scoring matrix.
- Number of Inquiries on the Credit Report – 10 percent. Having lots of inquiries makes it look like the borrower is in some sort of trouble or getting into too much debt. Again, this will have a negative effect on the borrower’s scores.
- Type of Credit – 10 percent. How much of the debt is secured? How much of the debt is unsecured? What are the loans for?
While Hard Money lenders do not place as much emphasis on the credit score, it is a factor that helps determine the quality of the borrower. This is important when doing riskier loans. In addition to the loan to value risk, the location and type of property, the Fico score reflects the reliability of the borrower.
All borrowers must have a credit background check, as it will reveal if there are tax liens or other issues that may affect the title or position of our new loan. And while we do not pay too much attention to the scores, if there is a trend of repeated BK’s or other issues, this may be a deciding factor. If you would like more information, please feel free to call me directly: 760-845-9035
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