If you don’t use cash to buy your home, you probably use financing. My goal writing this article is to help you, my client, understand the relationship of credit and financing. OK, now for the Disclosures. I am not a Lender or registered MLO (mortgage loan originator). :)
In the financing process, Lenders will determine your credit worthiness based upon three FICO scores. Each FICO score normally comes from these three credit bureaus: Experian, TransUnion and Equifax. FICO credit scores are the score typically used by lenders to determine your credit risk. Your credit score affects the interest rate you may qualify for. This may not seem fair. However, a lender/bank is backing your loan and your credit score is directly proportional to the lender’s risk. Who would you loan money to? A Buyer with a higher credit score of 790 or Buyer with a credit score of 690? The credit score limit for a FHA loan is 640. The credit score limit for a New Construction loan is 700.
As a matter of good financial practice and before you take the first step of buying a house, I recommend running a credit report/history. You can acquire these credit reports for free or nearly free. Some Credit Reports have erroneous information. I recommend correcting these credit errors before you start house hunting. See the chart below on how a FICO score affects your house payment on a $216,000 30-year fixed rate mortgage:
From the above chart, a person can save $207 per month; $2,484 per year, $74,520 over the loan life.
When you apply for loan approval, a credit report is run and a credit score is utilized. The credit score takes into account Payment History.
0-6 months – maximum impact
7-23 months – medium impact
Over 24 months – minimal impact
Recent delinquent payment history weighs heaviest on your FICO score. Frequency and severity of delinquent payments impact the score as well.
Is a collection agency calling you? You can still get a loan. Additional effort may be required to have past creditors ‘signed off’ on previous accounts. Be persistent and be very careful when making payments to a collection agency as a condition of a previous financial event. I recommend involving your Lender in this process.
What if your credit score is an issue? After all, sometimes life gives you challenges. Don’t panic, solutions exist. Rapid Rescore has helped when credit scores drop. Attaining a Bridge Loan until the Buyer’s credit score is acceptable for refinancing with other loan products (FHA, VA, Conventional, etc.).
Be clear about the number of Credit Score inquiries you perform. Frequent inquiries from you or various lenders can reduce your score 3-7 points per pull.
Buying a new car can reduce your credit score 5 to 15 points, per inquiry.
Taking out a new loan can reduce your credit score 5 to 15 points, per inquiry.
If you are married, the lender may use the lowest credit score of the couple (not the highest credit score).
A good credit score reduces your home and auto insurance rates.
Stay positive. There are several options to increase your credit score prior to receiving your loan.
Happy House Hunting!!!
Michele Limas – Oregon First
503-704-8148 (Call or Text)