to obtain a mortgage at all. Even if there are extenuating circumstances
as to why a specific score is low, most lenders, unfortunately, must rely on
the standards set by the government-backed Fannie Mae and Freddie Mac
programs, which purchase these loans.
The big picture can be boring! The bottom line here is quite simple. Your
credit score impacts your interest rate. Your interest rate impacts your
payment. Your payment impacts your debt ratio which in turn impacts what
you can afford, and more importantly, what amount lenders will loan to you.
It is important to keep in mind that credit scores are based on formulas
and algorithms that “generally speaking” look at five factors, weighted as
follows: Payment History (35%), Amounts Owed on Credit Cards (30%),
Length of Credit (15%), New Credit (10%), and Types of Credit Used (10%).
This boils down into a couple of easy tips to make sure your credit does
not hurt your chances of purchasing a home.
1) Pay your bills on time; if you have missed a payment, get current and
stay current.
2) Keep credit card balances low (less than 20% of your credit limit) but
especially do not let any card go over 50% of the card limit.
3) Don’t close unused credit cards; this will only hurt your average credit
age!
4) Don’t open any new credit cards or installment loans before applying
for financing.
5) Don’t pay any collections without first talking with a mortgage
professional (in many cases, it can result in a lowering of your credit
scores).
Real Hero Report |
Home Purchase
You always hear about your credit score and that you should strive to
keep it high, but why exactly is it such a big deal? Well, if you want
to purchase a home, you should realize how the mortgage industry
uses them.
Let’s start with the basics; what is your credit score? Simply put, a
credit score is a statistical value created by the three Consumer Reporting
Agencies (Equifax, Experian, and Transunion) to predict a consumer’s
behavior with finances. To create this score, the agencies generate
algorithms to predict this behavior through a scoring model, which in turn
creates a unique credit score for each borrower. When it comes time to
pursue a mortgage, lenders like lenders to use the credit scores as an
indicator of a borrower’s credit-worthiness.
So what does that mean for you, a potential borrower? Essentially, it is
a predictor of risk that is used to assess whether a borrower will repay
a debt. Logically, a high credit score translates to lower risk, whereas a
lower credit score usually is perceived as high risk. Borrowers with high
credit scores generally see rewards through lower interest rates and more
lending programs/options. Borrowers with lower scores may not qualify for
certain types of mortgage programs, or if it is bad enough, may not be able