How to Get Better Credit for a Home Loan
It doesn’t seem fair that one number can determine so much of our future. At 18, we get to vote and make adult decisions. At 21, we can drink legally. However, one number follows us around for the rest of forever.
What is a Credit Score?
Your credit score is more than a number you need to look good to get a mortgage. It paints a picture, good or bad, about your financial health. “Credit score” usually means your FICO score, a number between 300 and 850, that determines the likelihood that you will pay back a loan. The higher the number, the more likely you are to walk away with a mortgage approval or pre-approval.
The highest score is 850, and this person is pretty much guaranteed to pay her debts. Sadly, a person with a 300 is considered a shoe-in for the deadbeat rejection pile. So, what goes into deciding your fate?
Factors Considered in FICO Score Assignment
FICO stands for Fair, Isaac and Company, the original developers of the algorithm. The specifics are a closely guarded secret so that no one can cheat the system. However, FICO has published the components of the score the formula factors, in descending order of importance, are listed below:
- Payment History. – Do you pay your bills on time?
- Amounts Owed – How many credit cards and lines of credit you have and the balances of each determine this evaluation.
- The Length of Credit History – As you get older and use credit, this improves?
- New Credit – Too many cards opened at one time can be a red flag to lenders.
- Types of Credit Used – The combination of credit cards, retail cards, installment loans and mortgages you have right now.
Understanding the components will make it more meaningful when you check your credit report or score. A lot of people have errors in their report that they do not even know about and that impact their ability to borrow money.
Carefully review your credit report periodically and, if you have negative items, focus on improving them so that your credit score will improve. This attention gets you that much closer to a mortgage and your dream home.
Raising Your Credit Score
There is no quick fix for credit repair, so the sooner you start, the better. Here are a few tips to get you moving in the right direction. These are in order of importance.
- Pay off any outstanding collections right away.
- Don’t let your accounts go over-the-limit or past-due.
- Pay your bills on time.
- Keep your credit debt to 25 percent or less of the credit line.
- Don’t open new credit card accounts.
- Don’t close existing credit card accounts. This impact your overall percentage of credit used versus total credit availability.
- If you have an old card, use it and pay down the debt to show responsibility.
A reputable lender can suggest specific techniques such as which credit card to pay down first.
Credit Scores and Lenders
Generally, FHA-insured loans tolerate lower credit scores than conventional loans. The FHA has programs for homeowners to get a new mortgage even if the went through a short sale or foreclosure. You can save money with a good credit score in many ways. Private mortgage insurance cancels automatically once the loan-to-value ratio reaches 78 percent.
Conventional lenders base their interest rates on your credit score. For example, with a score above 740, you pay a lower interest rate than someone with a 700. This score is just one of many factors lenders look at to decide whether to give you a mortgage loan. They also consider your debt-to-income ratio, annual income, and overall assets.
However, the fact remains that your best chance to get a loan is to bring up your credit score.
This information is provided courtesy of The Eastside Real Estate Team. Keep us in mind for all your real estate needs. Call us today at 425-200-4093.