In our over committed society, our time is precious and few of us want it wasted. Some who feel it most keenly are those who are seeking to purchase their first home.
What it requires to gather documentation, for credit scores and going through the credit check process, may not seem like time well spent if they discover a lower credit score than anticipated. All is not lost however.
What is FICO score? The Original name of the company was the Fair Isaac Company. They looked at specific credit data to predict consumer behavior. Using that they were able to determine the likelihood of a borrower’s ability to assume a larger line of credit, which would go bankrupt and those who would be profitable.
Are FICO scores important? While FICO has been the gold standard of scoring for about 90% of lenders, it had been the only qualified scoring system for years. When purchasing your credit score from Equifax, Experian and TransUnion, you’re more likely to receive a Vantage score. In recent years, there has been controversy over the accuracy of other scores. Overall, the numbers are accurate. Though some differences exist, Fico treats missed mortgage payments the same as other missed payments. With VantageScore, late mortgage payments are more damaging. See the comparison chart here.
What factors affect my number? A lot of factors go into a score, but two that can really knock it down are high credit card balances and debts turned over to collections. Others include payment history recency, frequency and severity.
How to look at a low score: Although it is possible to buy a home with a low credit score, the interest rate rises significantly the lower it is. Additionally, a higher down payment will likely be required. Lower scores indicate to lenders that the buyer is a high risk candidate. What that also means, is that if your credit rating stays low, you will pay significantly more over the life of a home loan than another buyer with a better score.
How low is too low? Even though an FHA loan has the lowest credit requirements, a score under 500 is generally considered to be a bad loan. Since the housing crash, President Obama signed the Dodd-Frank Wall Street Reform into law. This made it a lot tougher to qualify for a home loan. That said, it is quite often difficult to get approval for a home loan with a credit score between 500 and 579. Coming up with a 10% down payment usually stands in the way of most low-score home loans.
Timely habits that improve score. Lenders look at other factors when you begin to reestablish credit. If you have moved on from an economic hardship, that would be in your favor. Having low debt to income (under 30%) can be an attractive counter balance. Compensating factors that reduce the lender’s risk give lenders more latitude to approve the loan. Additionally, a strong, yearlong payment history with no collections or late payments plays a significant role. Ideally, the buyer should have a strong track record at their job of two years or better.
How long does score improvement take? Putting an exact time limit on how long it takes to raise a score is tricky. It depends on the reasons for a low score. If you’ve had wages garnished, declared bankruptcy or defaulted on a loan, these can affect your credit for years.
Each month that bills are paid on time raises the score. Paying down credit cards use accounts for 30% of your score. The higher your balance, the lower your score, so it makes sense to get these as lowered as quickly before applying for a mortgage.
Being proactive with pay to delete
Collections on your credit report negatively impact your credit score. But, these are not impossible to clear up and have removed from your account, however you must call them directly. Ask them if they’ll agree to a pay for delete. This is an agreement (in writing) that you agree to pay the balance and in return, the creditor removes the account from your credit report. Paying collection accounts doesn’t improve your score and unless the lender directs you to pay it off, without the agreement in place, there’s no reason to do so.
We want to see you succeed in owning the home of your dreams. If you have questions regarding credit repair services, we can help. Call our office today at (614) 891-9000. We can provide numbers to trustworthy resources that can help not only repair credit but maintain an excellent score. Stop by our Facebook page, we’d love to say hello!