How Your Credit Score Affects Buying A Home
This is a great blog to share with first time buyers as they start their home search. Thanks to Nick T Pappas for giving us such a great start with that conversation. It is information like this that will set you apart from the rest of the Realtors those first time buyers are talking to.
How Your Credit Score Affects Buying A Home
Credit Score
Knowing how your credit score affects your ability to purchase a home and steps to take to improve or
maintain your credit is an extremely important factor when buying a home. Many home buyers often operate under the assumption that they can afford a home based on what they are currently paying for rent, but soon learn they can't secure a loan or need to lower their expectation of what they can actually purchase because they don't understand credit scores have on their ability to purchase a home.
Most have heard of or are somewhat familiar with FICO or Fair Isaac Corporation which uses an algorithm to determine your credit score. It does not show what you can afford, your ability to save or how you budget, but it does show you the consumer and more importantly, your lender, how you manage credit over time.
Regarding late payments, that's an easy fix...you know what to do...pay on time! Start paying on time as that can help offset your older late payments.
Debt To Credit Ratio
Your debt to credit ratio is something else, totally different, that you have a lot of control over. Looking at your credit report you'll see a heading or category named "amounts owed" which actually reflects the ratio of what you owe and available credit extended you. Your debt-to-credit ratio can greatly effect your FICO score. For example and with all things equal, if two people both owed $2,000 on their respective credit card and one person had a limit of $5,000 their ratio would be .40 or a 40% utilization. On the other hand the other person's card had a limit of $3,500 and also owed $2,000 then that credit utilization would be 57% and would yield a lower credit score. The higher the utilization is considered a red flag indicating a possible over-extension of financing. Even though you both may be perfectly capable of making payments the margin for error is less should there be a future financial "bump in the road".
The amounts owed category also reflects: number of open accounts, how recent they were opened, maxed balances, loans such as car or boat payments and the relationship of how much you owe to the original amount.
Goal Amount
Financial planners tend to suggest that your utilization number be no higher than 30% for all you credit accounts. So what can you do about your ratio? Glad you asked! Don't close old accounts because that credit limit can no longer be counted. Look at it this way; you have two credit cards and one had a limit of $1,000 and it was utilized at 100% or "maxed out"...and you owed $1,000 on the other card that had a credit limit of $4,000, but you only owed $1,000 yielding a 25% utilization. By paying off the card that was 100% utilized and leaving it open your credit ratio would be 20%. If you close the card with a $1,000 limit then your debt-to-credit ratio would be 25%.
Pay As Much As You Can
Don't simply make the minimum payments, pay as much as you can as soon as you can before applying for a mortgage.
Opening new accounts...Careful!
It might make sense to open more credit accounts that would increase your available credit and lower the ratio, however, your FICO score factors in how recently accounts have been opened relative to your loan application. Much of the mechanics behind the FICO score are closely guarded secrets so you'll never know everything thing that is looked at...always err on the side of caution.
If you have questions about how to improve your credit score, especially if you're considering a new home purchase feel free to give me a call or send an email. I may be able to direct you to more resources or lenders that can help.
If you'd like to know more about the Huntsville and Madison Alabama Real Estate market then -
Visit me at Your Huntsville Real Estate Resource
Content originally published at....http://nicktpappas.com/?p=3910
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