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Credit Healthy – Build It Right From Ground Zero

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When it comes to buying a home, few things are more important than your credit. The better it is, the more buying power you have. In this article the first is a series of posts entitled “Credit Healthy,” agent Joyce Marie Jackson breaks down your credit score and takes a look at what it takes to build your credit health from the bottom up. Whether you’re a first time homebuyer or this is one of many purchases you’ve made in your lifetime, it pays to understand what goes into your credit score so you can be prepared when it comes time to buy. Enough from us…we’ll let Joyce take it from here…

Credit Healthy
 

Too often a buyer is so excited about buying a home, the basics are forgotten.

You’ve saved some money, that’s good, and maybe paid down some of you debt. Your lease is coming to an end soon, so I guess it’s time to shop for a home. Is that it or are there other steps?

Here’s an option:

  1. Contact your financial institution and inquire if they offer a credit score and/or monitoring plan for free or for a small fee. You may ask yourself, “Why do I need to do this?”
    The reason is because before you can start a plan, you must know where you stand. Knowing what’s in your credit report is the first step in identifying the health of your credit worthiness.
    Your credit worthiness is what a lender will use to approve or disapprove you for a mortgage loan. It’s all in the report, but it’s up to you to make sure it’s accurate.
  2. Know how your FICO score is determined.
    • 35% – Payment History – Always make your payments on time.
    • 30% – Amounts Owed – Knowing your credit limit is key. The amount you owe and the amount your have available will determine your utilization ratio and debt ratio.
    • 15% – Length of Credit History – The age of an account is important. The longer you have a particular credit card, the better. If you decide to pay it off, that’s great! Just don’t close it out. Closing out a credit card that you’ve had for a long time can lower your credit score.
    • 10% – Type of Credit Used – Similar to building your retirement portfolio, your credit should also contain a mixture of different types of credit, such as credit cards which are usually revolving credit, fixed loans, and other mixtures of credit.
    • 10% – New Credit – New credit and the available amount. Don’t max it out.
    • So, 35+30+15+10+10 = 100% of your FICO score.
  3. List your expenses, make a budget and track your spending.

You’ve identified what’s in your credit report and taken steps to make the report accurate. You know what makes up a credit score and what parts you may need to work on in order to increase it. Saving is also key and must be part of the budget. In addition to having a great credit score and low to no debt, there is still a need to have available funds for various buyer expense such as inspections, appraisal, earnest money, option money, closing costs, and down payment. Does this mean buyers have to have perfect credit and be debt free before they should purchase a home? No, it just means that the more you know and the better prepared you are, the better your home buying experience will be. So, “Build It Right from Ground Zero.”

image courtesy of zeevveez

Your Credit and Buying a Home

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Credit Card

Everyone knows that when buying a home, your credit score comes into play. What many people don’t know is just how good is good enough to buy a home, how it can impact your chances of buying a home, and what to do if you have bad credit like rv bad credit loans and need some help repairing it. Credit can be mystifying at best, but with some common sense factors and a little knowledge, you can control your credit and keep yourself on the “plus” side so that you can buy a home easier and with more favorable terms.

What is a good credit score?

Credit score requirements change quite often as lenders adjust their rules and regulations to safeguard themselves. Immediately following the recent housing crisis, credit score requirements were raised, making it difficult for many buyers to get a loan, even if they had “decent” credit.

These days, 740 or higher is considered excellent credit. FHA and VA loans want a minimum of 620 and conventional loans, depending on down payment, look for a minimum of 640.

Please note: these credit scores can change at any time and are not considered fixed numbers. Please check with your local lender to see what loan programs they have and what their credit score requirements are.

How does my credit score affect my home buying?

The credit score (FICO) is a mathematical computation of all your credit history represented by a single number. This single number represents your credit worthiness – basically put, whether or not a bank can trust you to repay them their money in a timely fashion. If you have a low credit score, you are considered a higher risk for non-payment (whether it be default or late payment). The higher the risk, the less likely a bank is to lend you the money.

As with anything in life, the more trustworthy the lender feels you are, the more likely they are to lend to you…and the better terms you might receive on that loan. Of course, credit isn’t the only factor lenders take into consideration when making their decisions, but it is a big part. You can have excellent credit, but no cash on hand and be turned down for a loan. Your credit is the first item that helps a lender determine if they should dig further and take a look at your income, debts, and additional factors that will in the end determine your loan and the terms you receive for that loan.

How do I repair my credit?

The number one piece of advice for improving your credit score is to pay your bills and pay them on time – every time. Late payments are one of the worst things to do to yourself if you’re trying to improve or repair your credit score.

There are a few things you can do to repair your credit, the first is to know what’s in your credit report. You can access your credit report, for free, once a year at Annual Credit Report. We suggest you pull one every year in order to keep an eye out for any mistakes or fraudulent activity (identity theft). Take a look and make sure all the information is accurate. See anything that seems fishy? Contact the credit bureau and talk to them about the item. It may be something you forgot about or it might be something that you can dispute.

Sit down with a lender and discuss your plans to purchase a home. Often, if your credit score is borderline, they can offer specific steps to improve your score enough to get you above the minimum threshold for the loan. Occasionally, their advice might surprise you, so be sure you talk to someone who knows the ins and outs of credit first. We’ve seen instances where it was better to pay off a $15 charge than payoff a $5,000 charge, which may seem counter-intuitive when trying to improve your score.

If your credit score is really low, you may want to consider a credit repair company. There are many out there and some have not-so-great reputations. Be very careful and make sure you read all the fine print in order to be sure you know what you’re getting into. If you do go the credit repair route, be sure to remain diligent and follow all instructions, so that the process goes as smoothly as possible.

Special thanks to Luis Sandoval Jr. for asking the questions that led to this post.

image courtesy of The Consumerist