Credit Requirement for Islamic Home Loan
What is a Credit Score
Before deciding on what terms they will offer you a loan (which they base on their “risk”), lenders want to know two things about you: your ability to pay back the loan, and your willingness to pay back the loan. For the first, they look at your income-to-debt obligation ratio. For your willingness to pay back the loan, they consult your credit score.
The most widely used credit scores are FICO scores, which were developed by Fair Isaac & Company, Inc. (and they’re named after their inventor!). Your FICO score is between 350 (high risk) and 850 (low risk).
Credit scores only consider the information contained in your credit profile. They do not consider your income, savings, down payment amount, or demographic factors like gender, race, nationality or marital status. In fact, the fact they don’t consider demographic factors is why they were invented in the first place. “Profiling” was as dirty a word when FICO scores were invented as it is now. Credit scoring was developed as a way to consider only what was relevant to somebody’s willingness to repay a loan.
Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of inquiries are all considered in credit scores. Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or reestablishing a good track record of making payments on time will raise your score.
Different portions of your credit history are given different weights. Thirty-five percent of your FICO score is based on your specific payment history. Thirty percent is your current level of indebtedness. Fifteen percent each is the time your open credit has been in use (ten-year-old accounts are good, six-month-old ones aren’t as good) and types of credit are available to you (installment loans such as student loans, car loans, etc. versus revolving and debit accounts like credit cards). Finally, five percent is the pursuit of new credit — credit scores requested.
Your credit report must contain at least one account which has been open for six months or more, and at least one account that has been updated in the past six months for you to get a credit score. This ensures that there is enough information in your report to generate an accurate score. If you do not meet the minimum criteria for getting a score, you may need to establish a credit history prior to applying for a mortgage.
Credit Restoration Services
While a credit restoration service may be able to assist you, it is highly unlikely that you will get a permanent overnight fix to your credit issues. Restoring credit is a long term process, nothing will help you more than time. However, that does not mean there are things that you cannot do to fix errors in your report. The main success that a Credit Restoration service has is that they are persistent, they continue to dispute items until they get removed, even legitimate items. But sometimes, no amount of disputing will make an item go away. There is nothing a Credit Restoration Company can do that you cannot do on your own as long as you are persistent and proactive.
A few words on your credit rating.
There are many among us who think paying your bills on time translates into a good credit rating and while that is certainly part of the whole picture, banks, and other financial institutions look at industry benchmarks like your FICO score too. This is the metric that takes into account many different factors.
You need to remember that your past creditors and those you currently owe money to all have an input because they report credit information to the three major bureaus and there are quite a few variables. This information comes from several different sources including:
The ingredients that make up your credit. Although this is only 10% of the final score, it presents an overview of the lines of credit, loans and even credit cards you have.
- New Credit. Even when you make an inquiry, it gets recorded for your credit rating. That and the amount of new credit you’ve added makes up another 10% of your overall score.
- How established your credit is makes up 15% of the total score. This is basically the length of the time you’ve had credit.
- The bigger numbers of more importance come next and a full 30% of the rating deals with how much you owe in relation to how much credit you actually have.
- As you might have already imagined, how many late payments you make versus how often you pay on time is critical. That equals 35% of your final score.
There are a few other factors that weigh in like previous bankruptcies and even tax liens that can have an effect on your FICO score.
So, of course, there are those of you who are wondering how you can find your credit report and see what’s inside. There are three credit bureaus that keep this information stored and Equifax, Experian or TransUnion will supply a report free of charge once a year. This is a great way to see where your rating stands especially when you’ve been turned down for a loan.
If that’s the case, you can ask for information explaining why you were refused from the financial institution that turned you down and the information you’ll need to contact the appropriate credit reporting agency.
Legally, you have the right to a credit report that is accurate. That’s one of the best reasons to look at your report at least once a year and if you find something that’s wrong, you can follow these steps to make everything right again.
Detail and document the error in a dispute filed with the credit bureau either online or through snail mail. Remember that if they agree with what you’ve found is wrong, they have a legal responsibility to fix the error.
- The creditor involved needs to get a copy of your dispute as well. If the error is the result of something they did at their end and reported the inaccurate information, they need to take the lead and inform the credit bureau of the situation.
- The credit report needs to be changed. Keep in mind, even if the credit bureau doesn’t think you’ve done a satisfactory job explaining the issue, they must allow you to make changes with personal explanations that show up when your data is accessed.
These procedures are important to make sure your credit report is an accurate and fair representation of the way you use credit.