Having a good credit score is something that is incredibly important. The truth however is that most people don’t really know what their scores are. Lenders use the 3 major repositories, TransUnion, Experian and Equifax when considering the extension of mortgage financing. More millennials each year are maxing out their credit cards and other such debts, and falling behind on payments simply because of a lack of knowledge of how these obligations work. In a recent survey by Experian, it was found that 30% of millennials didn’t know the spending limits on their cards, and 50% didn’t know what interest rates their cards had. These numbers are startling! If you plan on buying a home; maintaining a solid credit score is crucial for your success.
What Is a Credit Score?
A credit score, also known as a FICO score, is calculated by deriving information from five categories. The categories are listed and weighted as such: (35%) Payment History, (15%) Length of Credit History, (10%) Credit Mix, (10%) New Credit and (30%) Amounts Owed. The exact method that FICO uses to determine a credit score by the 3 major credit repositories – Trans Union, Equifax and Experian, remains undisclosed, however, we know that it is calculated using the above parameters. Looking at these categories, it’s easy to suggest the ways to maintain good credit. The number you receive on your credit report will be anywhere from 300-850 with 850 being considered a “Super-Prime” credit score. Different lenders have different takes on what a good credit score is, but to be safe, you want your credit score to be around 700 or above.
How Can Credit Scores Affect the Home Buying Process?
So now that we’ve gone over what credit scores are, let’s go over why they are important when buying a home. When you first make the decision to buy or refinance a home; the first step that you should take is going to a lender and applying for a home loan. Getting a loan before browsing for homes is a crucial first step, as it gives you a clear cut idea of what your budget is. However, when applying for a home loan, the interest rate that you will receive is largely based on your credit score. Let me give you an example of how strongly your credit score affects your interest rate on a home loan. In a recent article I read, author Lindsay Konsko did some experiments with her own credit score. She has a ‘middle’ FICO score of 773. Lindsay found an online tool that would let her calculate how her credit score would fluctuate if she didn’t pay her bills for a month. She calculated that if she let her bills go unpaid for even one month her credit score would drop from 773 to 690. She then spoke with a mortgage expert who told her that that drop in her credit score would lead her to a 0.5% increase in payments for a 30 year mortgage. This may not seem like a lot, but over the course of 30 years, she would have to pay nearly $30,000 more in interest because of one month of neglecting her bills.
This is just one example of how important it is to maintain a high credit score. Even one month of negligence can lead to a lifetime of debt. However, if you pay your bills on time every month, keep your credit cards at 50% or less of the maximum credit limit, and don’t open new credit (auto, credit cards, student loans etc.,) within several months of when you will be applying for financing, your credit scores will improve. If you’re looking for a lender who can work with your current credit scores, contact Claudia E. Manly at (800) 645-1301.
CalBRE License #01199120. Licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act, License #4130097, NMLS #37660. These materials are not from HUD or FHA and were not approved by HUD or a government agency. NMLS 252332
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