Home Equity Tips: Understanding How Credit Scoring Works with Mortgage Loan Financing


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Credit scores are a result of a calculated method creditors use to help establish credit risk and credit worthiness. Information about you and your credit transactions, such as your credit card paying history, the number accounts you have, and the type of accounts (ie.installment, revolving, etc. ) Derogatory credit history is also a part of the credit scoring with reporting of late payments, collections, outstanding debt, and the age of your credit, is collected from your credit application and your credit report.

Using a statistical curriculum, creditors evaluate this information to the credit performance for people with comparable profiles. A credit scoring system awards points for each factor that helps forecast who is most likely to repay a debt. The total number of points for credit score will help predict how credit-worthy you are, and the likelihood that you will repay a loan and make the payments in a timely manner, as agreed.

Credit Score Relevance- Credit scores are based on real data and statistics, so it usually is more reliable than subjective or judgmental methods. It treats all applicants objectively. Judgmental methods typically rely on criteria that are not systematically tested and can vary when applied by different individuals.

Credit Scoring History- Years ago creditors sought to develop a system to evaluate consumer credit quickly without needing human intervention. According to the Federal Trade Commission, they developed criteria, where creditors choose a random sample of its customers or a sample of similar customers, if their sample is not large enough, and analyzes it statistically to identify characteristics that relate to creditworthiness. “These factors is assigned a weight based on how strong a predictor it is of who would be a good credit risk. " Each creditor can use its own credit scoring model, various scoring models for various types of credit, or a standard model developed by a credit scoring company.

Establishing good credit scores will simply the process of buying or refinancing your home. You will benefit significantly from maintaining high credit scores, and be rewarded with the best possible interest rates for purchases, debt consolidation, and home equity loans. Making late payments and letting accounts go to collections will cause you to labeled as “bad credit" and will result in a low credit score that raises your risk factor and interest rates with mortgage lenders. If you want to freedom to use credit for financing home improvements, or buying an investment property, then establish your credit with a good payment history and you will secure prime credit.

Dan Ambrose is a true mortgage authority who has been in the business for nearly 15 years. Today Dan is a free-lance writer, and account executive for Irwin Home Equity. He offers loan tips to anyone interested in maximizing home equity. Previously, Dan has done some consulting for Countrywide, Bridge Capital and BD Nationwide Mortgage. You can read more of his articles about Second Mortgage & Home Equity Loans online. For a complete look at home equity loans please visit Second Mortgage Rates or go to 125% Home Equity Loans online. For more credit scoring tips, please read the “Bound for Good Credit" published by the Federal Trade Commission.


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