While 100% financing is limited on VA Jumbo Loans, qualified veterans can still secure financing with smaller down payments and more flexible lending guidelines without having to carry mortgage insurance.

Most conventional jumbo loans require that the borrower bring at least 20% of the full purchase price to close.  By contrast, VA Jumbo loans generally require no more than 25% of the amount of the sales price over $417,000, or $625,000 in Alaska and Hawaii.

Let’s say a home sells for $700,000. Now subtract the maximum “zero down” VA loan amount of $417,000 and you get $283,000.  Simply take 25 percent of $283,000 and we determine that the down payment would be $70,750.  To sum up, for just over 10% down, qualified veteran borrowers can purchase VA homes in high cost counties with no mortgage insurance and with subsidized rate pricing.  By comparison, a conventional jumbo loan borrower would have to bring $140,000 to close and likely receive a much higher rate that a qualified veteran.

Currently however, in order to facilitate homeownership for qualified veteran borrowers in areas within the continental United States where the median home price exceeds the traditional $417,000 maximum (despite the recent home valuation trends of recent years), the Department of Veterans Affairs has extended loan guarantee benefits that allow for up to 100% financing.  Many of these “High Cost” areas are located in California or in high density, east coast states, like Maryland and Virginia.  To give one an example of the sorts of benefit loans available, consider the following counties loan limits, based on the 2010 updated figures.

• Los Angeles VA loan limit: $593,750
• San Diego VA loan limit: $437,500
• Alameda VA loan limit:$962,500
• San Francisco VA loan limit:962,500
• Orange County VA loan limit:$593,750
• Riverside County VA loan limit:$417,500
• Fresno County VA loan limit:$417,500
• San Bernardino County VA loan limit:$417,500
• Sacramento County VA loan limit:$418,750
• Santa Clara County VA loan limit:$633,750

While these areas have been designated as “High Cost” counties for the years 2009-2010, there is little indication as to the depth, extend or duration of how long these areas will be able to enjoy these benefits.  In fact, even despite what the VA has indicated they will currently guarantee, the extent to which lenders will honor or offer financing across these conditions exist on a case by case basis.  The best bet for any borrower looking to take advantage of these temporary benefits is to contact a VA approved loan officer who can navigate through the various opportunities available to you.

The “bad” news, well it has become somewhat more difficult to qualify for a home loan. The good news however, is that there are less hoops then you might think on VA Loans still.  So for those that do qualify for a VA loan and there are MANY that do, it is still the best option for a purchase or a refinance.

Let’s talk about a few of the hoops, and see how easy they really are to get through.

1.  Income qualifying-  The VA has simplified the debt ratios and allows some of the highest DTI, Debt to Income, ratios in the industry.  I recently had an approval on a 54% DTI, that is 13% higher than current conventional guidelines.

2.  Appraisals- it has to be done by a VA certified appraiser.  This is a great benefit to the buyer.  The VA has more strict guidelines that protect the veteran/active duty buyer from getting into a home that isn’t safe, hasn’t been maintained well or doesn’t adhere to current “livable” standards.

3.  Seller Concessions- the VA offers up to 6% seller paid concessions on purchase transactions.  So if you were buying a $280,000 home, the seller could offer $16,800 in concessions to make the deal work.  That is obviously a HUGE amount of concessions and I haven’t seen the need for that much but hey it’s available and an option if it really came to that.   In addition, almost all purchases currently have some sort of seller concessions to help pay for closing costs.  It is just the way the market has moved with all the volatility in the real estate market.  Sellers are willing to give concessions away so they can sell the house at all, in this kind of market.

4.  100% financing- best of all no money down financing is still available.  Boy that is when I wish I had access to the VA’s loan program.  We had to bring an arm and a leg to close so as to avoid paying mortgage insurance- which also the VA doesn’t have on any of there loans.  On VA loans they charge a funding fee, which goes to guarantee the loan, unless you collect disability from the VA and then they waive the funding fee altogether.

5.  VA Rates- among the lowest in the country, the VA “specialized” for government loans only offer rates as low as 3.25% today.  The best I could get on my own loan was 3.875%.

I hope I have helped to inform and bring up to date what the current market is to allow VA eligible home buyers to buy a house right now.

VA Loans Have Lower Delinquency Rates Compared to Other Home Loans

This type of financing remains a popular option for qualified applicants who want to finance their home in an affordable way. In 2009, the Department of Veteran Affairs guaranteed 325,673 VA loans, proving that the bad economy was no match for the program. These loans have a delinquency rate of only 5 percent. This is quite low when compared to the delinquency of other types of home loans, which are as high as 30 percent! This shows that the VA must be doing something right with its home mortgage program to be able to maintain such a low delinquency rate.

Why VA Loans Continue to Be Successful

VA loans offer many benefits to both current homeowners and prospective homeowners that allow them to save money upfront and over the life of the loan. This type of financing is unique in that it does not require borrowers to make a down payment on purchases. Many lenders are reluctant to offer this type of incentive because they consider it to be risky in this unstable housing market. The elimination of the down payment saves first-time home buyers thousands of dollars in out-of-pocket costs, which allows them to have more money for other expenses associated with buying a home. Homeowners who already have a mortgage can refinance their loan into a VA loan to receive a lower rate, cash or to consolidate their debt!

Currently, VA mortgage rates are at historical lows, which makes now a great time for individuals to get a VA loan. Compared to other types of home loans, these loans can offer even lower rates. With a low rate, homeowners can reduce their monthly mortgage payment and have more money available for other expenses. This type of financing also does not require mortgage insurance, so borrowers can save even more money over time.

Eligible Applicants Should Take Advantage of This Great Opportunity!

This type of financing is also easy to use because it has lenient credit and income requirements; applicants do not have to have perfect credit to be eligible! This is good news for those who may have been turned down for a conventional loan. Applicants will need to have a credit score of at least 620, and they must have gone one year without any delinquent payments. Consider financing with a VA loan to receive a low rate and save money! Interested veterans and service members should speak with a loan specialist to learn all of their options and how they can get started today! Our office makes it easy and simple to refinance. We have over ten knowledgeable loan officers in our office. They ready and willing to help you and inform you of all the great VA programs offered to you. Make sure to call us to take advantage of the great rates and benefits we can offer you!

Last year in a press release dated 1-28-09 (Mortgage Industry Faces Huge Bottleneck), LowVARates tried to educate and explain to all military and veteran home owners and buyers that the amount of time needed to process, underwrite and approve VA loans would be substantially longer than normal.

Due to recent drops in VA mortgage rates that have hit historically low levels, the mortgage industry is now facing similar issues to those in early 2009.  One approved VA lender, Flagship Financial Group branch 403 has said the following recently, “In the last 2 weeks we have seen our big lenders like Wells Fargo, Freedom Mortgage and Met Life all drastically slow down in the amount of time it is taking them to get our VA loans approved.”  It is tough because the home owner normally does not normally want to hear excuses and just wants the loan to get done quickly!”  “In all honesty our hands are tied.” said Nate Burt, Loan Officer.

All Veterans and military home owners should understand that patience is needed at times like this.  We looked into the published VA underwriting turn times from some lenders and they have almost tripled from where they were just a month ago.  It is important that loan officers educate and communicate with their clients so as to make sure everyone’s expectations and set correctly.

• Active duty personnel
• Veterans of different fields
• Some National Guard members
• Surviving spouses of persons who have died while on duty
• The spouses of personnel who are missing in action or taken captive

The VA loan has several advantages over the conventional loan. Some of the benefits of VA loans are as follows :
1. No down payments: Under this program there has to be no money down. The eligible buyers can finance 100 percent of a home’s price without making any down payment. Conventional loans have very high down payment requirements. They at least require 20 percent of the value of the house as down payment. Thus, a lot of people can not afford to take out these conventional loans. The advantage in case of VA loans is that they do not require any down payments.

2. Processed faster: If you are a potential buyer then you must submit your application and request for an appraisal of the property. This should be done before obtaining a VA loan. Some lenders, who have the VA approval for processing automatically, can finalize a loan. They do not need to wait for VA to review the application or the appraisal.

3. Protection of the lender: The VA guarantees that it will provide repayment of the loan in case the borrower can’t. Thus, the lender is safe from any loss in the event of the borrower not being able to pay. This attracts the lenders and so they help veteran buyers in getting better loans.

4. Lowers cost of the buyer: In case of the VA loan the funding fee is approximately between half and 3.3 percent. This may be included in the loan or is supposed to be paid out–of–pocket. The loan is designed in such a way that it is meant to reduce the cost for the buyer.

5. Flexible loan: These VA mortgage loans are not only for purchasing homes. They can also be used to build a new house or buy land. You may also take the loan out to make improvements to an already existing house. Thus, there is flexibility when it comes to VA loans.

I began doing VA streamline loans for military home owner in the fall of 1997.  At this time, I was attending college and simply wanted a part-time job that I can feel good about and it would also allow me to make a reasonable income.  A friend of mine, was working at a mortgage company that focused their efforts on veterans and a special type of loan for these military homeowners.  My first day of work I was given a sheet of paper full of phone numbers and was asked to start dialing as many veteran homeowners as possible.  Basically, at this time VA interest rates have recently come off of some of their highest levels in years and the mortgage industry was very under regulated and here I was at a company that was offering streamline refinances to almost anybody with a VA loan and a heart beat.  See a great video here on this subject!

Fast forward now almost 15 years later and I am still doing home loans for nation’s finest; military homeowners.  Today however, our mortgage industry is being regulated to the extreme and banks are making it more and more difficult for those of you with VA loans to take advantage of these historic interest rates.  I am not passing all the blame onto banks.  As someone who has worked in the mortgage industry for the past 15 years I realize the industry needed overhaul, regulation, and change.  However, as is typical we have now seen a knee-jerk reaction and over correction making it very difficult for some of the most deserving borrowers to take advantage of these historically low interest rates.

Since my beginning in 1997 I have participated in 4 or 5 what we like to call “refi booms.”  A refi boom is a time where almost anyone with a loan is looking to refinance and almost everyone can benefit from that refinance.  The situation we currently have in front of us here in the United States is one that I would have bet my entire career against.  For years there have been home owners not taking advantage of low interest rates during our refi booms and their rationale or reasoning at that time was that they knew interest rates would go lower.  I thought they were all crazy and to be quite honest some even ignorant.

I had conversation after conversation with military families that told me they were not interested in saving $200 a month for one reason or the other.  As a loan officer nothing frustrated me more than hearing someone that did not think it was worth their time, some costs and some energy to save $200 or more a month, not to mention hundreds of thousands over the long haul.

Some of the most common reasons I would hear as to why a VA loan holder would not want to streamline refinance are:

• The closing costs hurt my equity
• I’m not saving enough
• I think rates will go lower
• I don’t want to start over on a new 30 year loan
• and the list would go on an one

I am here today to tell you that if you are a veteran or military home owner and you have an interest rate at 4.75% fixed or higher or any type of adjustable rate or hybrid arm, THAT YOU NEED TO REFINANCE NOW!

You may be saying, “Eric you are admitting in this post that you were wrong before and that those that waited to refinance were right.”  THIS IS NOT WHAT I AM SAYING. Those families that refinanced along the way have saved way more money by taking advantage all the way along the drop.  It is the families that waited that may at this time be just S.O.L.

Those families that waited do not have access to the same easy VA streamline loans that they could have had years ago.  Just two years ago your home’s value (appraisal) was not needed, you did not have to have a FICO or credit score looked at, you did not have to be employed, and this list goes on and on.  So for the many families that waited, congratulations YOU WERE RIGHT, rates have gone lower, but for those same families that can NOT TAKE ADVANTAGE now I am sorry.

As a VA mortgage insider I am here to tell you at the rate that VA loans are changing, it is a matter of time and very little time until there are no longer VA streamline loans available.  I think this is a tragedy to our military, but it is the world we live in today.

Who cares if rates may be going even lower?  All of the reasons NOT TO DO A VA Streamline in the past are now gone.  Let’s revisit them:

The closing costs hurt my equity

I’m not saving enough

I think rates will go lower

I don’t want to start over on a new 30 year loan

The closing costs hurt my equity.

NO CLOSING COST VA LOANS are the majority of the loans we are doing now.  Seriously NO COST LOANS.  (see video here).  Do you really have any equity left anyway?

I’m not saving enough.

We are in what some tend to compare to the Great Depression #2 and if a couple hundred bucks a month is not worth it to you now, then it will never be.  I also want to remind you that when you do a VA streamline loan you get to postpone two mortgage payments and get a cash refund of your current escrow balance, thus putting immediate money in your pockets.

I think rates will go lower

You are just plane gambling and should mortgage your whole house and go to Vegas if you think this.  Suppose they do go lower, have you really lost by taking current rates that are the lowest they have been on record?

I don’t want to start over on a new 30 year loan

We have been offering 25 and 20 year loans at a pace never before seen.  Because rates have gone so low on VA loans, we see people taking a 25 or 20 year loan and still saving money each month!

Dear VA home owners, please for the love of whatever you cherish, contact us now and at least look into the VA streamline loan.  I seriously have never been a part of an opportunity like we see now and am very weary that it will ever come around again!

Here is a quick overview of some of the types of VA loans:

Fixed Rate- Fixed interest rate home mortgage loan offers a borrower to lock a certain interest rate for the life of their loan, unless the borrower chooses to refinance. The interest rate for the loan never changes no matter what is happening in the market. This gives a borrower a sense of comfort from a fluctuating market.

Advantages: Even if interest rates rise, you can keep your interest rate.

Disadvantage: If interest rates go down, your rate stays the same.

Term of Fixed Rate loans: Fixed VA mortgage rates are available for 40, 30, 25, 20, 15 and 10 years. Usually, the shorter the term of the loan the lower the interest rates. Longer term VA loans can be easier to get because a borrower does not need as much income. The most common fixed rate loan lengths are 30 and 15 year loans.

30 Year Loan: This is the most popular mortgage. Monthly payments are low since the life of the loan is long, but because of this their will be more interest over the life of the loan.

15 Year Loan: This loan life is shorter, resulting in a borrower owning their house quicker. A 15 year loan usually has a lower interest rate, but higher monthly payments.

Adjustable Rate (ARM) – Adjustable rate mortgages, VA Hybrid ARM, or Variable rate mortgages are loans where the interest rate adjusts based on indexes and or prime rates. With a variable rate the interest is tied into the lending institutions prime rate. Interest rates can vary from month to month. While the payment remains and only fluctuates slightly, the amount applied to the principle can change regularly. Typically lenders will set a cap for how high the interest can reach annually. Because of the flexibility, Adjustable Rate Mortgages often are less expensive than fixed rate mortgages.

Advantages: If you are going to be only staying in your home a short time an ARM is great since a borrower is able to exploit lower interest rates. Variable rate mortgages are also great if a borrower believes that interest rates will lower soon.

Disadvantages: It can be frustrating having your rate change sometimes month to month. If the market is bad, a borrower’s rate will be bad.

Terms of Variable Rate Mortgage or ARM- The term for ARM is usually 1, 3, 5, 7 year terms.

Hybrid Adjustable Rate Loan or Hybrid ARM- A hybrid ARM features an interest rate that is fixed after an initial period but then acts like an ARM thereafter. It hybrids together both a fixed rate and an Adjustable rate mortgage.

Advantages: Hybrids are the best of both worlds, getting a fixed rate at first but than later having more flexibility with the Adjustable Rate. Hybrids are particularly great if a borrower will not be staying in their home long.

Disadvantages: They have the disadvantages of both a fixed and an adjustable rate.

Term of Hybrid ARMS: Hybrid ARMS term is referred to first by the fixed amount rate and than the adjustable amount rate periods. For example ARM 3/1 is a fixed mortgage rate for 3 years and an adjustable rate for 1 year. The date the fixed rate switched to the adjustable rate is known as a reset date. A Hybrid ARM transfer some interest rate risk from the lender to the borrower allowing for lower interest rates.

VA Jumbo Mortgages- A jumbo mortgage is a mortgage that is higher than the typical loan amount. Jumbo loans may have a higher interest rate and different requirements for down payments than smaller home loans due to different underwriting requirements. Fannie Mae and Freddie Mac set standard for the maximum amount of a loan before it is considered Jumbo. The current limit is 417,000. Any home that costs more than 417,000 would be considered a Jumbo loan. With Jumbo loans Veterans will need to pay 25% on any amount over $417,000. Here is an example of how a jumbo loan works. A Veteran finds a home for 600,000. His maximum VA home amount is 417,000 with a $0 down payment. The Veteran pays 25% of 183,000 or 45,750. This amount acts in many ways similar to a down payment. Jumbo loans are required if you want to buy a more expensive home because lenders feel a greater risk.

In the wake of the mortgage meltdown JP Morgan Chase exited the TPO or brokered loans portal and decided almost over night that they would not even honor locked in TPO loans for veterans.  I personally had to disappoint numerous military families with this bad news and quickly become the bad guy!

I think all vets, military families, etc should keep in mind that JP Morgan Chase did NOT have veterans and VA loans in their interest a couple of years ago when it was needed the most!

Sincerely,

A frustrated VA loan officer

These tough economic times have made the line between soldier and civilian blurry at best, particularly when one thinks of “leaving no man behind”. Don’t our veterans deserve better than this? What about the veteran borrower returning home after his second tour in Afghanistan, only to find that the home he bought in Detroit for 80k is now worth less than $15k and the manufacturing job he was counting on died with the rest of the city’s work infrastructure. As he falls behind on his payments, how can he not feel even just a bit slighted by the system?

The intent of this post is to offer a hand out to government loan borrowers wishing for assistance on their va loans. Though there are many options available, few are being utilized effectively. Even if you are only using this post as a means to expand and clarify your options please feel free to contact James at any time and I’d be happy to answer them.

I. COMMON ALTERNATIVE OPTIONS TO FORECLOSURE THAT WORK

“An ounce of prevention is worth a pound of care.” Benjamin Franklin

Before exploring any foreclosure option, I would recommend checking out the free credit repair for veterans. This is an internal division that provides basic credit management education, and assists borrowers with disputing and updating their reports to the greatest point of accuracy. It is said that 70% of all credit reports have errors on them and an astonishing 1 in 4 have errors on them serious enough to prevent someone from getting the credit they are rightfully entitled to.

II. COMMON ALTERNATIVE OPTIONS TO FORECLOSURE THAT WORK

If you wish to stay in your home but have fallen behind on your VA mortgage payments there may be a way to save you from foreclosure. Contrary to popular belief, most lenders don’t want to have to resort to a costly and time intensive foreclosure process, particularly in a housing market such as this one. The following alternatives have been recommended from the VA Borrower Delinquency Page

A. Repayment Plan – The borrower makes regular installment each month plus part of the missed installments.

B. Special Forbearance – The servicer agrees not to initiate foreclosure to allow time for borrowers to repay the missed installments. An example of when this would be likely is when a borrower is waiting for a tax refund.

C. Loan Modification - Provides the borrower a fresh start by adding the delinquency to the loan balance and establishing a new payment schedule.

D. Additional time to arrange a private sale – The servicer agrees to delay foreclosure to allow a sale to close if the loan will be paid off.

E. Short Sale – When the servicer agrees to allow a borrower to sell his/her home for a lesser amount than what is currently required to payoff the loan.

F. Deed-in-Lieu of Foreclosure – The borrower voluntarily agrees to deed the property to the servicer instead of going through a lengthy foreclosure process.

III. Non-VA SPECIFIC ALTERNATIVES TO FORECLOSURE

A. Service Members Civil Relief Act (SCRA SCRA may provide a lower interest rate for up to one year, and provide forbearance, or prevent foreclosure or eviction up to nine months from period of military service. In order to qualify for certain protections available under the Act, his or her obligation must have originated prior to the current period of active military service.

B. If VA is not able to help a veteran borrower retain his/her home (whether a VA-guaranteed loan or not), the HOPE NOW Alliance may be of assistance. HOPE NOW is a joint alliance consisting of servicers, counselors, and investors whose main goal is to assist distressed borrowers retain their homes and avoid foreclosure. They have expertise in financial counseling, as well as programs that take advantage of relief measures that VA cannot. HOPE Now provides outreach, counseling and assistance to homeowners who have the willingness and ability to keep their homes but are facing financial difficulty as a result of the crisis in the mortgage market. The HOPE NOW Alliance can be reached at (888) 995-HOPE (4673), or by visiting www.hopenow.com.

IV. DIRECT ASSISTANCE with non- VA Guaranteed Home Loan Veteran’s Affairs

A. For a veteran or service member who may have obtained a conventional or sub-prime loan, VA has a network of eight Regional Loan Centers and two special servicing centers that can offer advice and guidance. Borrowers may visit VA’s Loan Guaranty website at www.homeloans.va.gov or call toll free (877) 827-3702 to speak with a VA Loan Technician. However, unlike the case of a veteran or service member with a VA-guaranteed home loan, VA does not have the legal authority or standing to intervene on the borrower’s behalf. Therefore, it is imperative that a borrower contacts his/her servicer as quickly as possible.

B. VA Refinancing of a non-VA Guaranteed Home Loan

C. Veterans with conventional home loans now have new options for refinancing to a VA-guaranteed home loan. These new options are available as a result of the Veterans’ Benefits Improvement Act of 2008, which the President signed into law on October 10, 2008. Veterans who wish to refinance their subprime or conventional mortgage may now do so for up to 100 percent of the value of the property, which is up from the previous limit of 90 percent.

D. Additionally, Congress raised VA’s maximum loan amount for these types of refinancing loans to $729,750 depending on where the property is located (this limit is significantly higher in Guam, Alaska, and Hawaii). These changes will allow more qualified veterans to refinance through VA, allowing for savings on interest costs and avoiding foreclosure. A VA refinancing loan may help a veteran who is facing a big payment increase.

V. DIRECT ASSISTANCE on VA Guaranteed Home Loan Veteran’s Affairs

C. When a VA-guaranteed home loan becomes delinquent, VA provides supplemental servicing assistance to help cure the default. The servicer has the primary responsibility of servicing the loan to resolve the default. However, in cases where the servicer is unable to help the veteran borrower, Loan Guaranty has Loan Technicians in eight Regional Loan Centers and two special servicing centers who take an active role in interceding with the servicer to explore all options to avoid foreclosure. Veterans with VA-guaranteed home loans can call (877) 827-3702 to reach the nearest Loan Guaranty office where loan specialists are prepared to discuss potential ways to help save the loan.

We depend on credit for so many important things in life — whether it’s for buying a car, house or computer or getting a student loan. A three-digit number — your credit score – can determine whether you can do these things and even how much it will cost you.

How can a simple number determine whether you can buy a house or car? If you’ve read How Credit Reports work, you know that your credit report contains a history of how you’ve paid your bills, how much open credit you have, and anything else that would affect your creditworthiness. Your credit score boils down all of that information to a three-digit number. Using the credit score, lenders can predict with some accuracy how likely the borrower is to repay a loan and make payments on time. It’s how electronics and department stores can offer instant credit.

This incredibly important number, which affects how much you pay for credit, insurance and other life necessities, used to be hidden from consumers. Until recently, only lenders and other businesses that used the score could access it. Fair Isaac and Company, which developed the score, felt that the score would only confuse consumers since there was nothing to tell them what it meant or what lenders were looking for.

In 2001, however, all of this changed due to pressure from the U.S. Congress and industry and consumer groups. Now you can view your credit score from credit reporting agencies and credit monitoring services.

But to help us understand that number and ultimately know how to improve it, we’ll need to find out how it’s calculated.

Credit Score Breakdown

Your credit score is calculated by weighing information in your credit report.

Although there are several scoring methods, most lenders use the FICO method from Fair Isaac Corporation. Each of t­he three major credit bureaus (Experian, Equifax and TransUnion) worked with Fair Isaac in the early 1980s to come up with the scoring method.

A credit score is determined much like a grade in school. Just like a teacher calculates grades by taking scores from tests, homework, attendance and anything else they want to use, weighing each one according to importance to come up with a final, single-number score. It’s the same for a credit score. But instead of using the scores from pop quizzes and papers, it uses the information in your credit report.

The number ranges from 300 to 850. Although the exact formula for calculating the score is proprietary information and owned by Fair Isaac, here’s an approximate breakdown of how it is determined:

35 percent of the score is based on your payment history. This makes sense since one of the primary reasons a lender wants to see the score is to find out if (and how promptly) you pay your bills. The score is affected by how many bills have been paid late, how many were sent out for collection and any bankruptcies. When these things happened also comes into play. The more recent, the worse it will be for your overall score.

30 percent of the score is based on outstanding debt. How much do you owe on car or home loans? How many credit cards do you have that are at their credit limits? The more cards you have at their limits, the lower your score will be. The rule of thumb is to keep your card balances at 25 percent or less of their limits.

15 percent of the score is based on the length of time you’ve had credit. The longer you’ve had established credit, the better it is for your overall credit score. Why? Because more information about your past payment history gives a more accurate prediction of your future actions.

10 percent of the score is based on new credit. Opening new credit accounts will negatively affect your score for a short time. This category also penalizes hard inquiries on your credit in the past year. Hard inquiries are those you’ve given lenders permission for, as opposed to soft inquiries, which include looking at your own score and have no effect on the score. However, the score interprets several hard inquiries within a short amount of time as one to account for the way people shop around for the best deals on a loan.

10 percent of the score is based on the types of credit you currently have. It will help your score to show that you have had experience with several different kinds of credit accounts, such as revolving credit accounts and installment loans.

This information is compared to the credit performance of other consumers with similar histories and profiles. The three major credit bureaus each have their own version of the credit score, all of which are based on the original Fair Isaac scoring method. Equifax has the BEACON system, TransUnion has the classic FICO Risk Score system, and Experian has the Experian/Fair Isaac RISK system. Some lenders also have their own scoring methods, which may include information such as your income or how long you’ve been at the same job.

We depend on credit for so many important things in life — whether it’s for buying a car, house or computer or getting a student loan. A three-digit number — your credit score — can determine whether you can do these things and even how much it will cost you.

How can a simple number determine whether you can buy a house or car? If you’ve read How Credit Reports work, you know that your credit report contains a history of how you’ve paid your bills, how much open credit you have, and anything else that would affect your creditworthiness. Your credit score boils down all of that information to a three-digit number. Using the credit score, lenders can predict with some accuracy how likely the borrower is to repay a loan and make payments on time. It’s how electronics and department stores can offer instant credit.

This incredibly important number, which affects how much you pay for credit, insurance and other life necessities, used to be hidden from consumers. Until recently, only lenders and other businesses that used the score could access it. Fair Isaac and Company, which developed the score, felt that the score would only confuse consumers since there was nothing to tell them what it meant or what lenders were looking for.

In 2001, however, all of this changed due to pressure from the U.S. Congress and industry and consumer groups. Now you can view your credit score from credit reporting agencies and credit monitoring services.

But to help us understand that number and ultimately know how to improve it, we’ll need to find out how it’s calculated.

Credit Score Breakdown

Your credit score is calculated by weighing information in your credit report.

Although there are several scoring methods, most lenders use the FICO method from Fair Isaac Corporation. Each of t­he three major credit bureaus (Experian, Equifax and TransUnion) worked with Fair Isaac in the early 1980s to come up with the scoring method.

A credit score is determined much like a grade in school. Just like a teacher calculates grades by taking scores from tests, homework, attendance and anything else they want to use, weighing each one according to importance to come up with a final, single-number score. It’s the same for a credit score. But instead of using the scores from pop quizzes and papers, it uses the information in your credit report.

The number ranges from 300 to 850. Although the exact formula for calculating the score is proprietary information and owned by Fair Isaac, here’s an approximate breakdown of how it is determined:

35 percent of the score is based on your payment history. This makes sense since one of the primary reasons a lender wants to see the score is to find out if (and how promptly) you pay your bills. The score is affected by how many bills have been paid late, how many were sent out for collection and any bankruptcies. When these things happened also comes into play. The more recent, the worse it will be for your overall score.

30 percent of the score is based on outstanding debt. How much do you owe on car or home loans? How many credit cards do you have that are at their credit limits? The more cards you have at their limits, the lower your score will be. The rule of thumb is to keep your card balances at 25 percent or less of their limits.

15 percent of the score is based on the length of time you’ve had credit. The longer you’ve had established credit, the better it is for your overall credit score. Why? Because more information about your past payment history gives a more accurate prediction of your future actions.

10 percent of the score is based on new credit. Opening new credit accounts will negatively affect your score for a short time. This category also penalizes hard inquiries on your credit in the past year. Hard inquiries are those you’ve given lenders permission for, as opposed to soft inquiries, which include looking at your own score and have no effect on the score. However, the score interprets several hard inquiries within a short amount of time as one to account for the way people shop around for the best deals on a loan.

10 percent of the score is based on the types of credit you currently have. It will help your score to show that you have had experience with several different kinds of credit accounts, such as revolving credit accounts and installment loans.

This information is compared to the credit performance of other consumers with similar histories and profiles. The three major credit bureaus each have their own version of the credit score, all of which are based on the original Fair Isaac scoring method. Equifax has the BEACON system, TransUnion has the classic FICO Risk Score system, and Experian has the Experian/Fair Isaac RISK system. Some lenders also have their own scoring methods, which may include information such as your income or how long you’ve been at the same job.