Credit scores.
Credit rating.
FICO.
You’ve probably heard these terms thrown around, but what do they really mean? And why are they important if you want to buy a home?
While it may seem like they’ve been around forever, credit scores are a relatively new thing — they first began in 1989, invented by the Fair Isaac Corporation (get it? FICO?), as a way to gauge how much a risk it would be to loan any individual money or lines of credit.
Your credit score (FICO score) is comprised of data about your debt and repayment history. These figures come from three primary sources:
While these three sources should be reporting essentially the same number, there are sometimes minor discrepancies due to what they each look for. For instance Experian looks at your rental history and the others do not. Transunion takes your empolyment history into account while the others just care about debt.
Your credit score could be between 300 (the lowest possible) to 850 (a perfect score). That breakdown looks something like this:
Poor: 300 to 579
Fair: 580 to 699
Good: 670 to 739
Very good: 740 to 799
Exceptional: 800 to 850
How are these numbers figured out?
Payment history (35%): Are you making all necessary payments on your debts? Are you making those payments on time? Even a single 30-day late payment could drop your score as much as 100 points!
Debt-to-credit utilization (30%): This is a fancy way of saying “How much of your available credit are you using?” Take all your lines of credit (credit cards, store-specific credit cards, lines of credit, loans, etc.) and add them all up. Then add up how much you’re using each month. If the amount you’re spending is more than 30% of what you have available, it reflects poorly here.
Length of credit history (15%): Having a long history with a specific credit looks great! Loyalty counts for something (finally!). Of course this also means getting new lines of credit hurts you as it lowers the average of your credit history and can hurt your score. So if you’re about to buy a home, DO NOT try building up credit with new cards.
Credit mix (10%): Diversification. Just like financial experts tell you to diversify your portfolio (stocks, bonds, IRAs, etc.) you should also diversify your credit types - credit cards, store cards, loans, etc. And remember to pay it all on time to look like a champ!
Number of credit accounts (10%): Like I said in the credit history above, don’t get new accounts just before buying a home. It’ll bite you in the ass! Likewise, don’t have a ton of credit cards. Keep it under 10 total.
A quick Google search can tell you lots of ways to check on your credit score — some are free, some not so much. But even some of the free ones have hidden fees if you don’t stop a subscription from starting up so read the fine print!
Mortgage lenders pay close attention to your credit score in addition to your debt-to-income ratio, your assets, and more to decide what kind of a risk you’re going to be.
So what’s a good score to get a home loan? Anything above 650 will be a huge help in finding a loan, although some lenders will give money to those with credit as low as 500. Having a higher (aka, closer to that 850 goal post) not only makes it easier to get approved for a loan, but you’re also more likely to get lower-than-average interest rates!
If you’ve been following along with my blogs over the last few weeks, you saw I said interest rates were climbing to an expected 8%. Well, guess what folks? That time is now!
According to Google, as of today (Oct. 27, 2023) we’re already over 8%, even if you’ve got amazing credit. And if your credit is less than steller - say... 630-ish? You’re looking at over 9%! Now, those numbers are based on a $300,000 loan. As of September 2023, the median home listing price was $999,000! Why don’t we just round up to an even $1Million for the sake of round numbers. Going with a $1M loan in CA it’s 7.26% (a little better, oddly) for those with outstanding 800+ credit, and 9.13% for those in the 660-679 range (you can’t even GET a loan in that range if you’re under 660! See, higher credit score = easier loan process).
What does that mean for you in terms of dollar values? Well, let’s do some quick math with this handy dandy Mortgage Calculator from CNBC (yes, the news company).
Say you’re in that high credit bracker where your $1M loan only costs you 7.26% (remember, that’s as of today... tomorrow it could be totally different so it’s always better to buy today rather than tomorrow). Plug those numbers into that calculator I linked to and you’ll find:
Monthly payment = $6,828.55
Total amount paid = $2,458,276.87
Total interest paid = $1,458,276.87
Same loan, but your credit score is 660, putting you at 9.13% and, whalah:
Monthly payment = $8,139.94
Total amount paid = $2,930,378.66
Total interest paid = $1,930,378.66
Same loan, but your mortgage costs you $1,314.39 more PER MONTH at the lower credit score, and $472,101.79 more over the life of the 30 year loan! That’s almost half a million bucks in extra interest!
OK. Yeah. That’s pretty scary stuff. But, I mean, Halloween is in a couple days, so it feels appropriate.
So what can you do if your credit is less than stellar? How can you boost that credit score to give yourself the best chance at a loan with some savings involved?
The most obvious answer is to make sure you pay down your debt - fast an on time!
Do NOT take out any new lines of credit while you’re trying to fix your credit score, it’s only going to hurt you.
And the #1 thing you can do to fix your credit score? You guessed it, I have a guy for that!
Working with me to buy a home gets you direct access to my credit repair guy, Jose Lopez over at My Elite Credit Group!
Jose and his team will take a deep-dive look into your credit to see what’s causing your score to be lower than it should be and help create an actionable plan to boost your score while eliminating debts for far less than if you were to pay it off yourself. Credit score goes up, debt owed goes down. That’s pretty win-win, right?!
For a free consultation to see if they can help you out (because remember, every case is different so results may vary), email Jose at [email protected] or give him a call at (562) 637-5057 and tell him Travis Seppala At Keller Williams sent you.
Even if you decide you don’t want to work with me to help you find the home of your dreams, Jose would be happy to help you.
Of course, I hope you will want to work with me.
If you do, you can reach me by email at [email protected] or by calling me at (734) 819-3257.