Tag Archives: Credit

The Importance Of Good Credit

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It’s no secret when we tell you that the better your credit score is, the easier your life can be. Your credit score is a three-digit number that represents how trustworthy you are from the perspective of someone that would lend you money for something like a loan or a mortgage. In fact, your credit is THE single most important determining factor from a lending perspective. Our economy runs on credit. So what is so important about those 3 numbers, and how does it impact your mortgage rates when you decide to buy a home? Here’s what you need to know:

  • Your credit report = Your financial report card. You want all A’s – Like we mentioned before, your credit score is a representation of how well you can handle your money, and can make or break a lender’s decision to approve you for a loan or mortgage, and impact your interest rates majorly. Your credit report is made up of how much money you’ve borrowed, your history of paying it back, and how much open credit is available to you. Here is what appears on your credit report: debts and a history of how they’ve been paid, public record information (tax liens, bankruptcies), bills referred to collection agencies, and inquiries made about your creditworthiness.
  • Credit score: Credit scores range from 300-850 points and are based on debt, amount of time you’ve used credit, debt totals, how often you apply for new credit, and types of credit you currently use based on information received from your credit report.
  • The higher your credit score, the lower your interest rates will be, and vice versa- The better your credit score is, the more banks and lenders can trust you, resulting in much lower interest rates for loans and mortgages. Don’t think interest rates are that big of a deal? Consider this- for a long-term credit loan such as a mortgage, interest alone can add thousands of dollars to your original buying price. Ouch.
  • Banks aren’t the only ones who look at your credit – so do landlords, employers, insurance companies, utility companies, phone companies, and more!

Having good credit is essential for having a healthy financial presence. So now that you understand how vital it is, check out these tips for improving your credit before shopping for a mortgage!

Credit Checklist Preparing for a Mortgage:

  • Start early – A year to a year and a half before you will be buying a home, do a deep analysis of your credit report. This will give you time to make minor changes to your score that can save you big bucks in the end when you start shopping for mortgage rates.
  • ALWAYS pay your bills on time- This is a given! It is also important and make an effort to pay more than the minimum balance if possible.
  • Have a mix of credit (auto, credit cards, student loans, etc.) – Lenders like to see a long and versatile credit history.
  • Keep a low balance – on any given credit card try not to use more than 30% of your limit.
  • Start saving now– It is ideal to try and aim to put a 20% down payment on your home, which requires a decent amount of cash upfront. Start bulking up your savings account now!
  • Don’t forget about closing costs!
  • Whatever you do- do not do these 5 things that will destroy your credit while looking for a mortgage!

When it is time to find a mortgage for your dream home, be sure to contact us so we can help make your dream rate a reality!

 

 

 

 

5 Things that will Destroy your Credit while looking for a Mortgage

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In the lending process, one of the most important things that brokers look at when determining if an applicant should be approved or denied for a mortgage is credit score. Credit score refers to the three-digit number that represents how well you handle money. Credit scores are calculated through data records that come from previous statements, monetary amounts owed, length of one’s credit history, new credit, and types of credit used. There are three different credit scores: Experian, TransUnion, and Equifax. FICO scores are what most lenders check when applicants are applying for a loan. There are three FICO scores checked, one for each respective bureau, to determine risk. FICO scores range from 300 to 850, and the higher the number is, the better credit one has.

According to the FHA, “Generally speaking, to get maximum financing on typical new home purchases, applicants should have a credit score of 580 or better.” Lenders will look at your score before approving you, and often during the loan process as well to make sure that nothing has changed. If your score is a bit lower than 580, don’t sweat it. As long as your credit future looks promising, you still can potentially get a mortgage, you just may have to pay a higher down payment. If you’re in the clear, congratulations! You are one step closer to owning your dream home. However, regardless of score, it is essential to avoid these 5 things when you’re applying for a mortgage that can potentially destroy your credit score.

1. Opening up a new line of credit– There are two types of inquiries when it comes to someone wanting access to your credit- soft inquiries and hard inquiries. A soft inquiry occurs when you want to check your own credit score, potential employers run background checks on you, or other small questions. A hard inquiry is a serious check into your credit either conducted by a lender, credit card issuer, or other financial institution. These hard lower your credit score for a few points and stay on there for up to two years. They must be authorized. When you open up another or multiple lines of credit during the lending process, this raises a red flag to your lender that you’re desperate for credit.
2. Closing a credit card account– On the opposite end of the spectrum, closing credit card accounts can also lower your credit score and cause issues when you are applying for a mortgage. According to Next Avenue, when you close out a credit card or consolidate all of your credit card debt onto one account, your credit score will take a ding. The article states “when you close a credit card account, you lose the amount of available credit on that card. This increases what’s known as your credit utilization ratio, or CUR, a figure that compares the amount of credit you’ve used with the total amount of credit you have available. The way to maximize your credit score is to have a low utilization ratio.” Avoid this when applying for a mortgage.
3. Not paying your bills on time– This is a given… but sometimes we forget that even the smallest slip in not paying bills can be an issue when it comes to your credit score. If you don’t already, set up reminders for every bill that needs to be paid a few days in advance to the due date.
4. Shopping around for a mortgage– It is extremely important to check your options when looking for a mortgage in order to secure the best rate possible. However, your FICO score takes a hit with multiple inquiries from different lenders. To compensate for this, within 30 days of a mortgage inquiry, additional inquiries are lumped into the first. What does this mean? If you are shopping around for the best mortgage rate, do so within a concentrated 30-day or less period.
5. Co-signing loans– As a parent, helping your child with a loan may seem like the best option to help them build credit, but be very careful when co-signing with your children for finances. It is in fact a good way to build their credit up, however, if they miss a payment it could shave up to 50 points off of your credit score. If you do co-sign, make sure to set reminders for when payments are due to remind your child and ensure that no payment will fall through the cracks. Yikes!

Want to apply for a mortgage? We can help.