Your Credit Score:What you Should Know

Mortgage and Lending with Sequoia Pacific Mortgage

The bottom line is getting your credit in order and asking your lender for options is the best way to secure a great loan. My best advice to ANYONE doing a purchase or even a refinance is to prepare early! I work with my clients to get their credit cleaned up before we make the plunge into finding them their new home. Why do I do this? I want my clients to get the most bang for their buck. If spending a month or two cleaning up credit can save my client hundreds (YES, it can make that big of a difference!!) then I do it! I spent my first 3 years in the Real Estate industry qualifying buyers and properties, I know how to "clean up" credit and make you look better!!


There are things you should know before you venture out to buy your home:

· Payment history - No matter what type of loan you apply for, one of the first things any lender will look at is your payment history. If you have made payments on time and even paid off loans early, that's a bonus.This factor accounts for 35% of your credit score!! So keep accounts that you have been paying on the longest and with the best history. If you have just a couple lates you can call your credit card companies and try to have them removed.... best advice for this is: If it doesn't work with the first operator, hang up and try again.

· Create a budget - This is highly recommended and will help you prepare for a home loan as well as keep you on track once you've purchased your home. Making a budget that factors in the new payment will help with the "shock" of a higher payment. With my first time buyers I often suggest that they take the difference in what they are paying now and what they will be paying and put the money in a savings account. This way they get used to the payment. This also gives people the chance to see if the are spending what they should.... Can they afford more or less?

· Credit Counseling - If you are in need of credit counseling because you are behind on payments my advice would be to take care of this BEFORE buying a home. If money is tight before you own it probably will be tight after.

· Bankruptcies, tax liens, and foreclosures can haunt you for years. Most stay on your credit report for up to ten years and can have a negative impact on purchasing a home. However, if you stay up to date on payments for two to three years after running into one of these situations, with a strong letter of explanation and the proof that you've been working to stay on target, lenders will work with you. It may take a little more work, but it is possible. This is VERY true. If you made a mistake financial but are on the road to recovery the bank with "forgive you", but you have to prove in the paper work that you can be trusted.

· Debt Consolidation- This is another option for reducing your debt to buy a house. In this case, the balance of your debt remains the same but companies are willing to lower interest rates, which do two things - they help lower your outgoing monthly payment and, they lower the overall balance you will be paying. If you have a lot of debt and need to bring your debt to income ratio down in order to qualify for a house, this might be a consideration. The normal ratio is what's called "28/36",meaning lenders believe you cannot spend more than 28% of your gross income for housing expenses and that the total amount of debt payments cannot exceed 36% of your income for a normal 10% down payment loan. This means that you should work on paying down credit cards, and avoid making new purchases before your loan CLOSES! This means wait to buy that new car, or washer and dryer till once you have moved into your new home, this can save you hundreds on your mortgage or mean the difference between getting a great loan or just getting a loan!

· Pay-off Options - If you plan to pay off some of your debt prior to applying for a home loan, consider going after the ones with the highest balances first. Although it's nice to pay off credit cards, available credit puts a person in risk of recharging after the home loan goes through and may actually hurt you in the approval process. If possible pay off the high debt before buying. A good mortgage broker can run your credit and point out what the problem is so you can fix it.

· Near Pay-off or Minimum Payment- If you are close to having a loan paid off, often times a lender will overlook this debt when looking at the ratios. In addition, lenders don't look favorably at loans where only the minimum payments are made.

· FHA Changes - Recently the Federal Housing Administration, FHS, has created new mortgage programs for potential home-buyers. This means that single-family closing costs can be 106% financed where the borrower doesn't have to come up with so much money to close the deal. These programs offer great rates and solid programs however to qualify you must meet the income restrictions. These programs are PERFECT for people who have low-moderate debt and pay all there bills on time. The programs often don't require a strong credit score so check with your broker!

Buying a home is a big step for most people, it is crucial that you take the time to learn about your credit score and lending options. If taking a month or two to "clean up" your credit report saves you $200 a month over the life of a 30 year loan thats $72,000!!! Well worth the investment! Call me today if you want more ideas on how to make your credit score work for you!


Comments (1)

Grant Howell
Alex Lowery Real Estate - Frisco, TX
Broker/Owner 214-234-6901
Thank you for the info. It is nice to read a post that is so informative and adds value to the community.
Jul 02, 2007 10:54 AM