In an attempt to educate today’s consumer we’ve created a series called “Financial Fitness”. In this series we will cover everything you need to know to prepare for buying a home. If you have questions that you want to see answered here, head over to our contact page and send it in!
In the first of this series Bill Cullen, our Financial Contributor explains the difference between credit scores and a tip to make a positive change to your credit with minimal effort!
With spring slowly inching towards us on the East Coast people are getting ready to dive head first into Real Estate Season! Homeowners are getting ready to list their homes and Buyers are preparing for homes to flood the market. As a buyer (first timer or vet) its important to make sure your credit is in tip top shape before applying for a mortgage. Below, Bill breaks down some important information about your score, specifically which score is most important and how to make a simple change that can positively impact your score quickly:
The big three determining factors in getting a mortgage approval are credit, capacity and collateral the old saying goes. Here we are going to talk about the first one, credit. These days the most important part of credit is the credit score. Not all credit scores are created equal!
There are many misconceptions about them. You will see ads on TV for services like Credit Karma etc. that say they will tell you your credit score. The problem with many of these services is that it’s not the same score that lenders use in making lending decisions. You may have heard the term FICO score used in many of these ads. This is a score generated by Fair Isaac Corp. There are many different FICO scores depending on the version used by FICO and required by the lender. Most lenders require the scores that FNMA requires. FNMA (Fannie Mae) is a government sponsored entity that buys most conventional mortgages and most loans are underwritten to their requirements. These versions tend to be more conservative than ones advertised on TV and so the scores tend to be lower than what people see when they get their Credit Karma score. Sometimes the difference can be as much as 50 points so be prepared to do some work on your score.
There are many factors that make up the credit score and they are grouped into 5 categories according to MyFico.com. The categories and weights of each are
- Amount owed 30%,
- Payment history 35%,
- Credit mix 10%,
- Length of history 15%
- New credit 10%.
As you can see, the single most important factor is your payment history, so it is vital that you pay your bills on time! Don’t count on a grace period, try to get your payments in early so there are no nasty surprises (but, it is not the only important factor). The second most important factor is the amount owed, this is where you can make some relatively easy changes to improve your score. The biggest factor in this section is the % of the credit limits that you are using. The lower the % of the limits, the higher the score. Ideally try to keep balances below 50% of the credit limit.
One surprising way to lower the %, if you have a good history with a lender, is to request an increase in your credit limit. This way your % of the credit limit goes down so your score should go up and you haven’t had to take funds you could use to purchase your new home to pay down credit balances.
I hope you found this helpful! A BIG THANKS to Bill Cullen for all the insight. Click on the hyper link to learn more about Bill on our Contributors page.
Up next…. tips and tricks to get your credit in shape to apply for a home loan
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