Tag Archives: real estate
The homebuying and mortgage process starts with your credit score.
Homeownership rates are near modern-era lows, but it’s not because people don’t want to buy. But surveys reveal that coming up with a down payment, qualifying for the mortgage, too much debt, and even credit score are holding them back from homeownership.
In fact, the majority of people who are planning to buy a house in the next 12 to 18 months are pretty confused about what credit score they need, and how to improve their score. However, this national survey found that only 45 percent of potential home buyers really understand what their credit score is measuring – their responsible management of debt and risk of defaulting on new loans.
Likewise, less than 50 percent of respondents could identify what their credit score affects in the mortgage process (such as interest rates, program guidelines, and the amount they qualify for.)
Their lack of clarity can actually hurt their score, further delaying or even canceling their plans to buy a home. For instance, 33 percent of consumers polled think that increasing income will help their credit score, and 28 percent believe that closing old accounts will do the same (not the case).
Even more concerning is that they’re unsure of where to even start with the knowledge, actions, and assistance to ready their credit for a home purchase. Only 22% of people polled thought that they should check their credit report in the three months leading up to their mortgage application!
Of course, when people start the process of buying a home, there are a lot of things to focus on: which neighborhood they want to live in, finding the perfect house, getting approved for a mortgage at a great interest rate, and then the all-consuming process of packing and moving. But before any of that happens, there is one more item that should lead off their checklist: taking care of their credit score.
So, keeping your credit score up to par has some very tangible benefits during the home buying process:
• Lower interest rates,
• A greater variety of loan programs available,
• Qualify for loans with less money down,
• Your offer on a house will be seen as more favorable if you have a high credit score, giving you more leverage. During multiple offer situations and bidding wars, the seller sometimes requests additional documentation like proof of the buyer’s credit score and funds.
• But, of course, saving money when you make your mortgage payment every month is the real benefit. Even a credit score increase of a few points may help you qualify for a lower interest rate, adding up to tens of thousands of dollars in savings over the life of your loan.
Consider these three scenarios, where three consumers who are buying a $400,000 home, with a $320,000 mortgage, qualify for interest rates of 4%, 4.5%, and 5%, respectively. Please note this is just an illustration for educational purposes.
Interest Rate: 4%
Monthly Payment: $1,527
Total of 360 Payments: $549,982.42
Total Interest Paid: $229,982.42
Interest Rate: 4.5%
Monthly Payment: $1,621
Total of 360 Payments: $583,701.48
Total Interest Paid: $263,701.48
Interest Rate: 5%
Monthly Payment: $1,717
Total of 360 Payments: $618,418.51
Total Interest Paid: $298,418.51
That means if your credit score was top notch and you qualified for a 4% interest rate (hypothetically), you’d save $190 a month compared to the 5%, and $94 compared to the 4.5% loan. That sounds nice, but doesn’t seem like big money, right?
But when you compare the long-term savings, the person with the 4% loan saves $68,418 in total payments over the life of the loan compared to the 5% loan, and $33,719 compared to the 4.5%
That’s some HUGE savings for just a very small interest rate difference. (For even more information how a good credit score will save you money, read this.
So, how do you make sure your credit score is ready for the home buying process? Here are some tips to make sure your credit score will be as high as possible when you’re ready to buy a home:
1. Always pay on time.
According to FICO, 96% of people with a FICO score of 785 or greater have no late payments on their credit reports, so be one of those people who have a spotless payment history if you want the perfect FICO. Since payment history is 35% of FICO’s scoring model, paying on time is crucial.
2. Check your credit report periodically.
It’s important to make sure that there are no errors on your credit file and everything is in order. These days, you also need to make sure that your identity hasn’t been stolen or compromised, which affects up to 1 in 8 Americans every year.
3. Spend less and pay down your balances.
FICO calculates a significant portion of your score by your credit utilization ratio – how much debt you keep to how much your total available balances are. A survey of those who had the top scores revealed their average credit card balances relative to their limits was just 7%.
FICO calculates 30% of their scoring model by the overall money you owe and how close you are to the limits on your credit cards and revolving debt, so low balances, and healthy ratios are the key to a top score.
4. Keep a good mix of credit.
Consumers with FICO scores above 760 have, on average, six accounts that are currently “paid as agreed” and an average of 3 accounts with a balance.
5. Keep well-seasoned accounts.
Most super scorers also have, on average, an account that’s 19 years old. The average age of their accounts is between 6 and 12 years old and they opened their most recent account 27 months ago or more. 15% of FICO’s scoring is calculated by the credit history.
6. Start early.
Don’t wait until you’re ready to start looking at houses or apply for a mortgage to start working on your credit. Get a copy of your credit report from Nationwide Credit Clearing six months before you’re ready to apply for a mortgage. That will give you plenty of time to pay down debt, close unwanted accounts, or dispute errors and inaccuracies in order to maximize your score – as well as working with Nationwide Credit Clearing to repair your score.
7. Do’s and Dont’s during the home buying process.
It’s important not to make big changes during the mortgage process, as it may trigger a red flag for lenders, who are trying to make decisions based on a static snapshot of your finances. Avoid big purchases on credit, moving large sums of money to and from bank accounts, and applying for any new credit or closing existing accounts.
8. Consider getting help.
Before you even sit down with a mortgage broker or take a ride around town with a Realtor, home buyers would be wise to contact Nationwide Credit Clearing. With a complimentary free credit report and consultation, we can analyze your situation and give you an accurate assessment if your credit is home-buying worthy or needs some work.
Contact us today to get started – and happy home hunting!