Sunday, June 14, 2015

Understanding Credit Score and its Importance to a Mortgage

Home searches have plenty of difficult steps. From finding a great real estate agent to locating the
perfect property, the long process can seem insurmountable at times if you aren’t prepared. The first,
most vital step to any successful home search, however, should relate to financing. When you contact a lender to find out about your eligibility for financing, there are a few key factors that are taken into
consideration in order to ensure your likelihood of repaying the loan. While quantifiable numbers
including debt-to-income ratio are important, you’ll struggle to find a single factor more important than credit score.

So, what is a credit score? Based on your financial history, your reliability in repaying debt is
condensed into a single number known as a FICO score. From total loan amount to interest rate, your
credit score can have a major impact on your home search and financial future. Let’s take a look at how it all relates to a successful home search.

Your credit score can range from 300 to 850, but most lenders want to see a score higher than 680 for
a conventional home loan. While you may find exceptions, be wary of hidden costs to cover the added risk to your lender.

Since the downturn of the economy years ago, lenders have become increasingly stingy with loan
approvals. While credit scores of less than 600 could have once got your foot in the door with mortgage lenders, today, you’ll struggle to find an affordable loan with less than perfect credit. According to BankRate, paying your bills on time, maintaining and paying lines of credit on time, increasing the length of your credit history, having multiple types of credit accounts and limiting new credit applications are all ways to boost your score over time. If your score limits your choice of lenders, consider improving your credit reports before beginning a home search.

With your credit score, your entire financial history could come into play. Pull your three credit
reports in order to get a better look at the negative items holding you down. While three separate reporting agencies maintain independent records on your payment history, you may still experience inaccuracies and inconsistencies with reports. To combat unforeseen issues, pull
your credit reports annually to search for incorrectly reported problems. A single issue can mean the
difference between a low interest rate and a denied loan request, so be diligent when reviewing your
records. TransUnion, Equifax and Experian are all legally required to provide one copy of your credit report to you at no cost annually, so there’s no reason to leave your score up to chance.

Even if you get approved for a mortgage, the effects of a lower credit score could cost you a bundle
over the life of a loan. Luckily, there are alternatives to improve your repayment terms. If your interest rate is a bit too high thanks to a few dings on your credit, your savings could play a part
in getting your rate into a more affordable range. Ask your lender about points, which are a type of fee that nearly every lender offers to exchange your savings for lower interest rates. In most cases, points are ignored, but it could be a worthy option to consider for making money back over the life of a loan.

According to Credit.com, finding the breakeven point at which the fee will repay itself is a great way to determine if paying points is a good option to counteract your higher rate.  With each point accounting for one-quarter of a percentage on your loan, the savings can be worth the research.

If your major negative items are from a few years back, it could be worth your time to wait before
beginning your housing search. Remember, the bad marks will fall off of your report after a specified
period.

Depending on the dings on your credit report, time could be just the option for saving you some cash. If you’ve got late payments or a Chapter 13 bankruptcy, the seven year mark is the magic date for
improving your score. If you’ve filed a Chapter 13 bankruptcy in the past, your credit report will be
dinged for 10 years before rebounding. If your negative marks are approaching their expiration dates,
consider taking a little break before beginning your home search and applying for financing. A relatively short break could lead to big savings over the life of your home loan. For additional information, depend on the experts in the fields of finance and real estate to get your property hunt off to a great start.

Hudson F. is a writer whose interests include homes for sale in Georgetown, the college basketball and NFL football.

Sources:

http://www.bankrate.com/finance/credit-cards/what-is-a-credit-score-1.aspx

http://www.credit.com/loans/mortgage-questions/understanding-mortgage-points-mortgage-rate-vs-

fee/

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