How Credit Scores Impact on Home Buying
If you’re not quite clear about the cryptic subject of credit scores, you can be certain you’re not alone. Making an effort to get your credit on the right track to buy a home can feel a bit dismaying.
Credit scores haven’t always been the key influence behind credit decisions but over time the impact of credit scores has become more and more important. Today, almost every loan program available has a minimum credit score.
First developed by data analytics company FICO, (originally named the Fair Isaac Company), years ago, credit scores abide by an algorithm. Using predictive analytics, FICO looks at a range of credit information and uses it to create scores to predict consumer behavior, such as how likely someone is to pay their bills on time, or whether they are able to handle a larger credit line.
Five characteristics of credit history make up each three-digit score: payment history, account balances, length of credit history, types of credit used and how often new credit has been applied for. Improving credit scores happens more quickly by concentrating on the two categories which convey the greatest impact: payment history and account balances.
Payment history accounts for 35 percent of the total credit score. If an individual makes a payment more than 30 days past the due date, scores fall. While an occasional late payment won’t do sizable damage, a pattern of late payments will definitely tank your score.
Account balances, comparing outstanding loan balances with credit lines, make up 30 percent of your score. As the balance of an account grows and approaches or exceeds the limit, scores fall. On the other hand, a low balance will help you keep your score higher. For instance, if a credit card has a $10,000 credit line and there is a $3,300 balance, it will actually improve your score.
The remaining factors carry much less weight but should still be monitored. How long someone has used credit makes up 15 percent of the score – all you can do is just wait. Types of credit and the number of credit inquiries both makeup 10 percent of the score.
Bear in mind, lenders, creditors and other third parties don’t all use the same formula to generate consumer credit scores and they weigh the information differently. To complicate matters even further, the information used to calculate your credit score may vary based on the credit bureau supplying your report.
The three major credit bureaus, Experian, Equifax, and TransUnion, maintain separate credit reports on consumers. Each version of an individual’s credit report may not contain all of the same information; some will be more detailed than others, and the information may vary because not all companies report all activity to all three credit bureaus.
Income doesn’t factor into credit scoring – some people with high incomes have terrible credit while some people without a lot of money have great credit.
To help monitor your credit profile, you’re legally entitled to a free copy of your annual credit report from each of the three major credit bureaus without affecting your score. Not only does this ensure you
have an accurate picture of your financial situation, but it can help you catch inaccuracies and permit you to dispute them in a timely manner.
Less-than-great credit means less-than-great loan terms, and the biggest factor is interest. Generally, the lower your credit score, the higher your interest rate, which can add up to paying thousands more over your lifetime. Even raising your score 100 points or so can save you money in the long run.
You don’t have to have flawless credit to get a mortgage, but lenders will reward a higher score with more choices and lower interest rates.
Lower credit scores have a better chance for a home loan insured by the Federal Housing Administration, but you may need an ample down payment too. Potential homebuyers with higher credit scores have more options, so for some buyers, it might make sense to keep renting while using the time to polish up that credit profile.
If your considering buying a home, speaking with an experienced Realtor can help you understand the affordability in the market based on your individual circumstances.
The Platinum Group Realtors is the number one independent real estate firm in Colorado Springs. Combining top Realtors with the resources to provide home buyers and sellers with platinum service and platinum results.
With over 80 percent of their business coming from referrals, The Platinum Group, Realtors deliver top quality customer service the utmost honesty, integrity, and attention.
For a no-obligation consultation, call today: 719-536-4326 or visit PlatinumHomesSales.com