Jack Conroy

REALTOR

 

 

In reality, Credit is a double-edged sword.   Having a good credit score allows you to receive loans, mortgages, and purchases at lower interest rates.  But the flip side of the coin is that the ease of buying now and paying later often leads to debt that can paralyze you financially.


CREDIT SCORE ? Your credit score determines the amount you can borrow and the interest rate you pay.  This score is a numerical figure that tells lenders your likelihood and ability of repaying what you owe to your creditors.  The type of score most widely used is known as a FICO score, which is a scoring system developed by Fair, Isaac & Co.  These scores are provided to lenders by the three main national credit bureaus: Experian, Equifax and TransUnion, each operate independently,  use different scoring criteria and they don't share information.  Scores range from 300 to 850.  Each of the credit bureaus will report a score for you, lenders will generally use the score which falls in the middle.  Example:  If your scores were 648, 658 and 668.  The score most likely to be used is 658.

What you don't know about your credit report can really hurt you.  More than 1 in 4 people have errors on their credit reports.  These errors can result in higher interest and insurance rates, denial of a job and worse.   Remember, there are three major credit bureaus - Equifax, Experian, and TransUnion ? they don't share information.  So you need to check each credit report carefully.  An error may only appear on one report or all three reports.  Also, if you correct an error on one credit report, you will have to do the same on the other two.

 

Here is a general table of how your credit score would affect your interest rate if you?re borrowing 70% or more of the value of the home.  The higher the score the lower the rate and the greater the chance you will be offered credit.

Credit Score

Interest Rate

720 +

6.500 %

680 ? 719

6.625 %

660 ? 679

6.875 %

640 ? 659

7.000 %

620 ? 639

7.250 %

 

Credit Scores (FICO) are based on five factors:

1.       35 % - your payment history ? did you pay at least the minimum payment during the last 6 to 12 months and were they paid on time.

2.       30 % - how much you owe at this time ? the total debt you owe in comparison to your total credit limit.

3.       15 % - the length of your credit history

4.       10 % - the amount of new credit

5.       10 % - the type or mix of credit accounts in your credit report.  Mortgages, car loans, student loans, credit cards, etc.

Actions you should consider before you look for a mortgage:

If your score is lower than you want, and you?ve taken these steps at the beginning of your house hunting, you will have time to improve your score and you won?t fall in love with a house you can?t afford and you will get a better interest rate.

1.    You can now get your credit report for free online at annualcreditreport.com.

2.    Get copies of all three credit reports six months before you apply for a home loan.

3.    Review each report for accuracy.  If you find errors dispute them immediately.  You have the right under federal law to challenge items on your credit report.  The credit bureau then has 30 days to decide whether that item should be removed.  An error on your credit report can take months to clear up.

4.       You have the right under federal law to challenge items on your credit report. The credit bureau then has 30 days to decide whether that item should be removed.

5.       Remember, There are three major credit bureaus - Equifax, Experian, and TransUnion - and they don't share information.  So even if you correct an error on one credit report, you will have to do the same on the other two.

6.       Now, Get your three credit scores.  A credit score must be purchased separately. www.myfico.com

7.       To improve your credit score quickly: always pay your bills on time,  pay down the total amount you owe, reduce your credit card balances, pay off debt rather than moving it around.  The ratio of your credit card debt to your credit card limit is key!  Do not close credit card accounts with zero balances, this will increase your score.

8.       Finally, identify other actions you can take to increase your scores and implement an action plan to make it happen.

Finding the Right Lender and the Right Product:

The lowest interest rate may not be the best buy.  Be sure you know all the cost associated with the loan before you commit to a product.  Some of the cost include but not limited to:  Initiation fee, Application fees, Underwriting fees, Credit report fees, Early payment fees, Private mortgage insurance fees, Documentation fees, etc.  Find and work with a Realtor and a Financial Advisor who can identify and explain all of the cost associated with each of the mortgage products you are considering.  Be sure you comparison shop and there is no perfect product for everyone ? your needs are unique to your financial situation and your goals.