30 Days of All Things Credit Series

Welcome to my fresh video series where we are going to discuss all aspects of credit score and what you can do to solidify and/or boost your credit. 

Why Does Your Credit Score Matter? Credit Tip #1

1. Why does your credit score matter? What does it convey to lenders?

credit score is a three-digit number designed to represent the likelihood you will pay your bills on time. The companies who generate and track these numbers are called “credit bureaus”. The most widely known credit bureaus are TransUnion, Equifax, and Experian. There are “alternate” bureaus as well, but for our objectives today, we’re going to talk about “The Big Three.”  

Once you apply for credit, lending organizations typically obtain credit reports and scores from all three bureaus. Rather than averaging your scores, they use the middle score of the three to rate your “creditworthiness” and to evaluate their risk in extending credit to you.  According to myfico.com, FICO scores are calculated using many different pieces of data in​ your credit​ report

This data is grouped into five categories:

● Payment history (35%)
● Amounts owed (30%)
● Length of credit​ history (15%)
● New credit (10%)
● Credit​ mix​ (10%)

Be conscious, there are multiple credit scoring prototypes available; the most well-known and perhaps the most widely used are “FICO” scores. Recently, the “Vantage” score model has also become popular. These two scoring models are not the same thing; be aware that there may be some variation.

The credit score does affect the percentage rate you’ll be offered when getting a loan such as a car loan, or a Home Mortgage. To qualify for a Home Loan, you must meet traditional least credit score provisions. You should also know about your credit score, whether it meets the minimum required score, and then how you can improve it.

5 Factors That Will Make Up Your Credit Score - Credit Tip #2
2. What sort of things make up your credit score?             

There are five factors:​              

● Payment History ​makes up to 35% of your credit score. You want to be sure to pay your bills on time, all the time! One thing you may want to consider doing is establishing an account specifically to cover the automatic payments for the minimum amount due on all your credit cards and loans. Of course, you’ll always want to pay more – but by having the minimum payment automatically deducted, you’ll avoid the consequences of being late, and well establish and maintain a solid payment history. Consistently paying creditors on time is the most important factor in determining your credit score; even one missed payment can have an impact. Your FICO​ Score considers: The number of accounts with missed payments over the last 7 years, amounts that have been owed on delinquent accounts, collections, and negative public record information.
 
● Credit utilization:​ Credit utilization makes up about 30% of your score. Credit Utilization relates how much of your available credit you are using. Your credit utilization should be less than 30%. So if you have a credit limit of $10,000 then one must carry a balance of $3,000 at most. Your credit utilization is reflected in the balance across all of your cards. This factor contributes to 30% of your overall credit score. 

● Age of credit accountsThose who are using older credit accounts will have an edge. This​ shows lenders you are responsible for the credit you already have. This factor accounts for 15% of your overall credit score. 

● Varied account types: Credit cards are revolving accounts, these are typically unsecured or signature loans.  Installment loans are typically “secured” loans, such as car and home loans which are secured with collateral.  Having multiple account types shows lenders you are responsible for managing multiple debt types. This factor contributes 10% of your overall credit score.  

● Hard inquiries: The quantity of “hard inquiries” you have on your account and how recently​ they were pulled affect your score.  Every time your credit is pulled (an inquiry is made), it does lower your score. Lenders do not like to see many applications for credit in a tight period.  Lenders do a hard inquiry when you apply for a new credit card or loan. These inquiries are a good indicator of credit-seeking activity, which makes up about 10% of your FICO​®​ Score. In general, you don’t want to have too much credit seeking activity or too many inquiries in a short period of time. While this may seem like a lot to remember, in reality these are all things you’ll need to be aware of and practice, whether or not you’re getting a new loan. Nonetheless, whether you already have credit cards and loans, or are just getting started with credit, these factors are important as they can affect many areas of your life beyond just obtaining credit: renting a home, obtaining home and insurance, consideration for employment, and more. For the best results, remember to pay on time, utilize only a small amount of your available credit (or quickly pay down any credit you’ve used), keep accounts open a long time with satisfactory payment history and show that you have and can maintain various types of credit. 
Why You Should Start Building Your Credit ASAP! - Credit Tip #3
3. Length of time you have had established credit.

The length of time your accounts have been open determines your “length of credit history”, which typically makes up 15​% of your FICO​®​ Score.  
It is crucial to start building​ your credit history as soon as it is possible. There are several ways to do this.

First, if you have a friend or family member with a strong credit history who may be willing to add you as a legal user on an established credit card, you may be able to “piggyback” off their credit card activity to help establish your credit. Even if you don’t use the card, the account can still show up on your credit report, potentially lending positive impact to your score. Piggybacking on the wrong person’s credit could be a negative, if they have a few late payments or suddenly charge up their credit cards; use care if considering this option. Parents with soon-to-be high school graduates, if you’re confident your credit history is strong and you can keep it this way, then this is a great option to help your teen build credit.

There are some precautions you should be aware of:

●      Caution #1:  The specific credit card you put them on matters… it helps if you put them on a card with excellent payment history, that you have had a long time (maybe longer than you’ve had them!). This method can prove to be very  helpful. Your FICO​®​ Score considers the age of your oldest credit account, the age of your newest credit account, and the average age of all of your credit accounts. 

●      Caution #2:  If you’re late paying your bills – even if it’s not this one – this strategy could hurt them rather than helping. You must protect your credit AND theirs. 

Unsecured and Secured Credit Cards - Credit Tip #4
4. Secured and unsecured credit cards

One of the best ways to increase your credit score and/or build credit is to get  a prepaid credit card or a secured credit card. Let me show you how it works:

You make a prepaid deposit such as $300-500 in advance, and then get the secured card. This type of card almost has certain approval. 

Every month you charge 10 or 20% of the limit, and then pay it off. Like an unsecured credit card, a secured credit card company reports to the major credit bureaus. I have seen this increase a potential home buyer’s credit by over 30 points in one month.

It is possible you’ll be declined, but I suggest that my prospective clients who need to build or establish credit consider applying. You do want to be certain that the secured credit card you choose reports to the three major credit bureaus.

If you don’t have the funds to make a security deposit then consider an​ unsecured credit card. Unsecured credit cards are based on your creditworthiness. You urge to analyze each credit card to see what fits you best. Interest rates, annual fee, and credit bureau reporting are all characteristics that you should notice while pertaining to an unsecured credit card.   

What Loans Affect My Credit Score - Credit Tip #5
5. Loan Types:

Just like credit cards, there are two types of loans that you can get. Installment loans (typically secured) and Revolving loans (typically unsecured).

Installment type loans are car loans, mortgage loans, auto loans and personal loans with a specific end date, a maximum amount.  Revolving credit is credit that does not have a specific end date but has a minimum payment due each month.  The most common form of revolving credit is a credit card, either bank or retail credit cards. 

A home equity line of credit is another type of Revolving credit.  The most ideal situation for a credit score is a blend of both installment and revolving credit.

Creditors want to know you can responsibly manage a mix of credit types. That’s why your credit mix makes up about 10% of your FICO® Score.  Your FICO® Score considers the types of credit being used and reported such as installment loans and revolving accounts.
Does Your Credit Limit Affect Your Credit Score - Credit Tip #6
6. Capacity of credit. 

Once you’ve begun to establish – or maintain – good credit, it is very important to be aware of how much of your available credit that you are using. You’ll want to keep this amount low! As a rule, you’ll want the percentage of your available credit that you use to be under 30% of what is allowed. This applies not only to your overall credit, but – and this is important – it applies to each individual card or line of credit. 

For Example:   if you have a credit limit of $5,000 on a credit card you only want to use 30% of the capacity of that card.  Meaning, you only want to use $1,500 of credit, leaving $3,500 available credit that is unused. This works to “scale”, meaning, if your card has a $500 limit, you’ll want to limit the balance to a maximum of $150 (30%).

Here’s a tip: If you have one credit card with a $10,000 balance and another with a much lower balance, transfer some of the debt from one credit card to the other so that the capacity used *on each card* is as close to 30% as possible. One thing that is very important to note – If you pay off a card, DO NOT CLOSE THE ACCOUNT. It will look like you have LESS available credit, and that you’re using more of the credit you have available. 
Check Your Credit With A Lender - Credit Tip #7
7. Get your credit checked. 

Skip the free apps.  Go to a qualified lender if you plan to buy a home in the near future and have them pull your credit! 

A qualified lender has analysis tools that can help you prioritize what to pay off first, or to determine what kind of additional credit you need in order to increase your score. The analysis tools of a lender also will tell you what accounts to pay off and how much of that account to pay off.  Believe it or not sometimes a lender will tell you not to pay off all of the debt in some cases.  Partnering with a qualified  lender and an experienced real estate agent can help you get into the home of your dreams faster! 

Bonus Tip:  While you are working on your credit score, be sure to be looking at homes online. You want to “favorite” the homes that you like.  You can then monitor which houses sell quickly, and you will learn how the market works in the price range of homes that you are looking in.  This also helps you narrow down what you really want in a home!
Is Your Credit Report Accurate? - Credit Tip #8
8. Accurate Report?!

Review your credit report NOW, and periodically, to verify that all reported items are accurate. There may be a credit line that is reported incorrectly, or one that’s duplicated.  Maybe you paid something off and it is still reported as being owed.  It is possible there is something completely incorrect, such as an account that doesn’t even belong to you or one that’s been reported as late, when you have proof of paying on time. 

It is important to look at your credit often and make sure nothing is “off”. This also helps you find out immediately whether fraud has occurred on your credit.   If there is something on your report that is incorrect, dispute it immediately, and get it fixed. Follow up the dispute.  If you dispute something, it will show up as disputed on your credit report until the dispute has been cleared – either the item verified as accurate.  Most mortgage lenders will not close on a home loan with an open dispute still on your report, so it is very important to get this done quickly and to verify it’s been resolved.

Important to note: What is reported to each bureau may vary. Periodically review your report from each of the three bureaus.
Dispute Errors on Your Credit Report - Credit Tip #9
9. DISPUTING ERRORS on your credit report – Identify which accounts you need to “fix”.

It is important to note that you may have an account reported correctly to one bureau, mis-reported at all to another bureau, and potentially not reported at all to the third.

This can affect your overall ability to obtain a home loan because one bureau may have no record of a card that has a high limit, but you carry little or no balance on it and pay on time every month… yet they show a high balance on a card you were 30 days late on one time, therefore they may report a LOW score for you – while another bureau may report the high-limit card you pay on consistently and not the other, showing a higher score.  This can be confusing if you only look at one credit report, and think you have a high score – while a lender is telling you that you can’t qualify.  

It is very important that you review your credit report  – know what’s reported – look for errors and DISPUTE THEM! Identify which accounts have errors you need to address. Talk with a qualified lender to determine the best method to “fix” these items!
How to check your credit without hurting your score - Credit Tip #10
10. Soft Pull and Hard Pull on your credit. 

A soft and hard pull on your credit are completely different and its super important to know the difference. 

Soft pull is at no penalty to the consumer meaning it doesn’t “cost you points” off your credit score.  The soft inquiry also does not show up on your credit report.  One caveat to that is if you are getting a free report from some of the different places to do that–soft pulls will show on that.  This is used by insurance companies, background checks, pre-approval offer for credit card, employer, etc.  

hard pull costs you 2-5 points and is tied to an application you fill out.  The lender or person actually has your permission to “pull your credit”.  Hard pull credit inquiry examples are home loan, auto loan, credit card application, and rental home application.  If you have a higher credit score most often the number of points deducted from your credit score are in the lower of the range I mentioned above.  The number of hard pulls/ inquiries on your credit matter and we are going to talk about that in greater detail tomorrow!
Do Credit Inquiries Matter? - Credit Tip #11

11.  Credit Inquiries on your account. 

Why do credit inquiries matter when determining your credit.

When you apply for any loan your credit report is checked and used to evaluate your credit risk for the lending institution.  By applying for a loan you are authorizing the lender to pull your credit.  If you have lots of inquiries in a short time frame its concerning to lenders because they view it as you trying to take on lots of new debt.  Its not always bad but you need to keep track of how many inquiries you have in two years.  Hard inquiries are removed from your credit after 2 years. 

This is especially important when you are purchasing a home!  I have had clients that are under contract on a home,  go shopping for a new vehicle or new furniture that they plan to buy with loan and because their credit had been checked multiple times their credit score was then too low to actually buy the house!  So especially when you are house hunting or under contract on a home do NOT apply for additional credit cards, loan etc.

Get an Installment Loan - Credit Tip #12
12.  INSTALLMENT LOAN.

Get an installment loan – for example, a car loan, from your local bank or credit union.  If your car is paid off, it may be worth it to borrow 500-1000 against it as a “car loan” – then deposit – and leave – ALL of the loan proceeds into your savings account, from which you’ll automatically pay on the installment loan from that account.

Don’t forget to put a little extra in the account to cover the interest. In as little as 6 months or a year, you’ll have established a solid payment history! It is VERY important you don’t withdraw the money – it is your “insurance policy” that the loan will be paid in full, and on time. In order for this to be effective – you ALSO need to keep your other bills current. 

TIP:  It is VERY IMPORTANT you pay this loan responsibly, or you could risk losing your car.  Handled responsibly, this is a great way to establish NEW credit, if you don’t have any yet. There is little risk to the bank or credit union, because the money they’re loaning you is secured by the title to your vehicle.

Effectively – you’re borrowing a relatively small amount against an item of greater value. You’re establishing a positive relationship with a local bank or credit union, as well as establishing, or improving, your credit score.
Credit Tip #13 How Does Bankruptcy Affect Your Credit?
13. Bankruptcy. 

How does bankruptcy affect your credit and how does it affect buying a home?

If you have had a bankruptcy in the past you can still build credit and buy a home!  After the court discharges your bankruptcy your debts are no longer negatively affecting your credit and it is very likely if you continue to pay your bills on time and don’t take on debt your credit score will go up. 

In addition, if your credit score improves you may be able to purchase a home within 2 years if you are using a FHA or VA loan and 3 years if you are going to purchase using a conventional loan.  The government backed loans allow for a lower credit score, some at credit score of 580 with money down.   

Planning is key here so if you have had a bankruptcy give us a call and we will put you in touch with a lender than can help you get on track to buy a home!
Credit Tip #14 Pay Your Bills On Time
14.  Pay Your Bills on Time. 

35% of your credit score is based on paying your bills on time! 

One strategy that may help you with this is to set up a savings account that you automatically put money into with every paycheck, and add to whenever you charge something. Then set up automatic minimum payments for ALL credit cards.

MAKE SURE YOU HAVE enough in the account (and have overdraft protection, if possible) to cover these every month.  This way, you will never be late paying your credit cards. 

Of course you will want to pay much more than the monthly minimum.  This strategy is designed to make certain you are NEVER late, even if the bill cycle is shorter one month, etc.

CreditKarma tells us in their guide to Using credit cards strategically that paying your bills on time is a TOP PRIORITY. They recommend that you:
● Make your payments on time. Your payment history is one of the major factors that influences your credit.
● Pay your credit card bill in full and on time each month.
● Buy only what you can afford to pay for with cash.
● Stay well below your credit limit.
Credit Tip #15 Household Budget
15.  Set Up and Follow a Household Budget Plan.

TheBalance.com tells us that “Making a budget is a key piece of a strong financial foundation. Having a budget helps you manage your money, control your spending, save more money, pay off debt, or stay out of debt. Without an accurate picture of what’s coming into and going out of your bank account, you can easily overspend or find yourself relying on credit cards and loans to pay your bills.” 

Keep in mind your GOALS, your current financial picture (What is your current income? What kind of debt do you currently have? Do you have savings? Are you expecting large planned expenses? What if you have an unexpected expense, such as a car repair, or health issue, etc.?). Getting a picture of your budget does require a little work, but it may be easier than you realize. 

There are many tools out there to help you create and even stick to a budget. Your method should reflect your goals, your needs, your personal situation, and what works for YOU. This may vary, depending on whether it’s just you, or whether you have a partner/family or other special circumstances. 

Ultimately, it is important that you make a realistic budget that you can actually live with.  There are several popular budgeting tools available, from “pen and paper” budget templates, to spreadsheet software, to apps/services online such as EveryDollar, Mint, YNAB, GoodBudget, PocketGuard, and many more.  Your bank or credit union may offer budgeting tools and may even offer free classes and other tools to help you get started. 

Tip: If you use an online program, make sure you’re using appropriate security measures since you’re plugging in your actual financial information!
Credit Tip #16 Settle Your Debt
16.  Settle Debts.

Settle Debts that are in collections/ with collection agencies. Debt collections come in many forms. Whether it’s an unpaid medical bill, a cell phone bill, or even an $18 library book you never returned, an unpaid debt can lead to negative information on your credit report. But it is possible to remove collections accounts from your credit report to restore your borrowing power. 

Tell the credit agency that you want to pay the account but you want it deleted from your credit report.  Lendersnetwork.com even says not to pay collection accounts without a “pay for delete” letter. A “pay for delete” letter is an agreement that you will pay the outstanding debt if the collection company deletes the account from your credit report entirely.  Just make sure you don’t agree to pay the balance without a pay for delete letter.

Here’s what you do: You offer to pay part of your balance due in exchange for getting all negative information related to the debt off your credit report. For this to work, you have to get this agreement in writing. An agreement over the phone won’t hold up. If you’re already working with a lender, they can give you more information on which collections/ debts you must get paid off.
Credit Tip #17 pay down credit card debt!
17.  Pay down your credit card debt.

Pay down your credit card debt to increase your credit score, but don’t close those accounts!!!

We’ve already learned that capacity of credit is important and that you don’t want to go over 30% of your credit limit on any account.
Start getting rid of your credit card debt by paying off every credit card you have by at least 70%.

If you have multiple credit cards, it’s more important none of them have over 30% of credit limit capacity than it is to have them paid off.  Another way to lower credit limit capacity used is call the credit card company and ask them to raise your credit limit. 
Just make sure you don’t charge any more on your credit cards once you’ve paid down debt or raised the credit limit..  And once a card is paid off do not close the credit card account. Closing those accounts will likely cause your credit scores to dip because you lose that account’s available credit limit.
That means any balances remaining on other credit cards will then account for a higher percentage of your total available credit, which can hurt credit scores.
Credit Score #18 CAPTIONED
18. Avoid taking on more debt.

Avoid taking on more debt when you’re trying to get approved for a mortgage loan and for goodness sake, don’t take on more debt or make job, income or credit changes once you’ve been approved to buy a home!. 

When you’re trying to get your credit score up so you can buy a home, it’s important that you don’t have your credit pulled for anything like an auto loan, furniture,or  even a new credit card.

The same thing goes once you’ve been approved to buy a home and have a home under contract.

Adding new debt raises your debt to income ratio, and having your credit pulled can lower your credit score. 
I actually had a buyer once who had a house under contract and before the closing she went furniture shopping. They had this great no interest for 18 months deal going on, so she applied for their credit card and financed all of this wonderful furniture for her new house.  Well when it came time for final underwriting, this furniture shopping frenzy had lowered her credit score and raised her debt to income ratio and it totally ruined the deal.  She wasn’t able to get financing and we had to terminate the contract on her dream home. 

Wait until after you’ve been pre-approved and closed on your new home to buy furniture or that new car.
Don’t apply for any new credit and if you get  a credit card offer shred it. The only time It’s okay to apply for a new credit card is if you have little or no debt, and you need a credit card to establish a line of credit to increase your credit score.
Credit Tip #19 Do Not Close Accounts
19.  DO NOT Close Accounts.

Did you know that when you close an account it can actually cause your credit to GO DOWN?!

Getting out of debt and Lowering your debt to income ratio is so important if you’re trying to increase your credit score so that you can buy your dream home.But once you pay off those accounts you don’t want to close them. 

Additionally,  you don’t want to  close your unused loan accounts. So if you have store credit cards you aren’t using, leave them open.  Why?  Closing your accounts can cause your credit score to dip and Closing an account reduces your available credit, which makes it appear that your utilization rate, or debt to income ratio, has suddenly increased.

Simply put leave those credit lines open until after you’ve closed on your home. 
Credit Tip #20
20.  Don’t have the best credit? Give yourself time.

Credit repair takes about three to six months to resolve all of the disputes that the average consumer needs to make. Of course, if you only have a few mistakes to correct or you repair your credit every year, it may not take as long. You might be done in just over one month.

On the other hand, if you’ve never corrected your credit and have a large volume of things to dispute, it may take longer. It’s important to remember that credit repair is usually one step (often the first one) you take when you want to obtain a better credit score. So while the repair process may only take 3-6 months, the time it takes to rebuild your credit can take longer. It can take up to a year or more to achieve a good credit score, depending on how low you start.

One thing you can do to expedite the process to better credit is to start taking steps to build credit while you’re getting items removed through credit repair. Stay on top of your payments to create a positive payment history and take steps to reduce your credit card debt load so your credit utilization ratio is as low as possible. Here’s the great news! If you want to improve your credit and buy your dream home in 2021, there’s still time. We can point you towards some great lenders who can help you get there. 
Credit Tip #21
21.  Credit MISTAKES cost HOW many Points?

The higher your credit score the more a credit mistake costs you in credit score points.   Maxed out cards cause your credit score to go down by anywhere from 10 to 45 points depending on what your current credit score is. Take a look here at this graph, you can see that the higher your credit score for each of these credit mistakes, more adversely affects your credit when you make one of them. 

For example:
If your score is 680 and you have a maxed out card, it can impact your score between 10 to 30 points, but if your credit score is higher, say 780 then maxed out cards will impact you between 25-45 points.  This is the crazy! A 30 day Late Payment negatively affects your score anywhere between 60 and 110 points.

So pay your bills on time, don’t let them go to a 30 day late.  A Debt Settlement drops your score from 45 to 125 points. WOW!!!, that’s insane. A foreclosure affects your score between 85 and 160 points and lastly a bankruptcy negatively affects your score and can drop it anywhere from 130 points to 240 points.
Credit Tip #22 Debt Consolidation
22.  Debt Consolidation.

Debt consolidation can lower your debt payments. However, you may only be trading one problem for another.  Not too long ago I was working with a couple who had not yet spoken to a lender but they were sure they could buy a house.  They had recently undergone a debt consolidation and paid off some debt.  But when they spoke to the lender, they found out they couldn’t buy at that time because they had used a debt consolidation company.

The way a debt consolidation company works is that they will negotiate with your creditors for a reduced balance on your accounts.  You’ll only have one  “consolidated” payment that you make each month to the debt consolidation company, and they in turn will make a monthly payment to each of your creditors on your behalf. But, because you are not re-paying the full amount owed as agreed, this will negatively affect your credit score. Even if there are no late payments on the account.

A better way to consolidate debt would be to apply for a personal loan, preferably one with a relatively low interest rate, and then use the money from that loan to pay off all your credit card balances at once.
23.  Don’t give up! 

If buying a house was easy everyone would do it, but DON’T GIVE UP! Buying a house is one of the best investments you’ll ever make, and  It is worth it!

Getting ready to buy your first house can be one of the most exhilarating and stressful moments of your life. But armed with the right information, you can shop for a house, apply for a mortgage and close the deal with confidence.

The most important step is to Prepare your finances for the mortgage process. The last thing you want to do is find your dream home only to discover you’re not financially qualified to buy it.

Getting a mortgage requires a good credit score. You’ll want to check your credit score to look for any errors so you can get them corrected immediately.  A fast way to improve your score by a few points is to pay down credit card balances and stop using them for two months before you apply for a mortgage.

Also, you’ll want to avoid applying for credit (for example, a new credit card or car loan) until after you’ve closed on your new home. If you’re buying a home with a spouse or other co-buyer, your mortgage lender will likely consider both buyers’ credit scores in the application process. That’s not to say you’re necessarily doomed if one person’s credit isn’t as good, but don’t count on things going off without a hitch just because one buyer has a stellar score.

Finally, remember that improving your credit score significantly can take at least six months, so get started if you plan to buy a home in 2021!
24.  Debt-to-income ratio

There are other factors.  Credit scores are not the only thing that is taken into consideration by the mortgage lender. 

The other debt you have including, the monthly payments on that debt.  So your monthly payment on your car, credit card minimum payments, new house mortgage and any other monthly debt needs to be  45% of your total monthly income  or 45% DTI (Debt To Income) is good average to go by.

That is the max for FHA/WCDARD is a little less and Conventional is all over the place depending on your overall credit history and score. It really comes down to the whole picture. Assets, credit score and income.

The DTI is the proposed house payment plus Again your monthly debt is any monthly obligations such as credit card, auto payments, child support, etc. Any legal obligations along with the proposed house payment.  The best thing to do is to talk to a lender that can guide you on what you need to do to have you debt to income in the right ratio to qualify to buy a home.
25.  What does a credit score get you when buying a house and beyond? 

What is the credit score needed for a first time home buyer? What about the other loan programs? You probably know that your credit score will affect whether or not you can qualify for a home loan. Did you know that it will also affect your interest rate, which affects your payment, which in turn can affect how much home you can buy? 

Your credit score also contributes to the cost of your Auto insurance, Homeowners insurance, and more. It will ALSO affect how much home you can afford.  A lender is going to look at the “big picture”. They will identify a maximum payment they believe you can reasonably pay, and set a qualifying loan amount, based partially on your credit score. 

A home mortgage/home loan involves more than just paying off the principal you’ve borrowed. There are factors known as “P.I.T.I.” or Principal, Interest, Taxes and Insurance, that go into this formula.

Credit scores fall into several rating categories, such as “very poor, fair, good, very good, excellent or exceptional”. According to Experian, 67% of Americans have a rating of “Good” or better. 

Most home loan programs require a minimum credit score of 620 (first time home buyer) along with other criteria. Once you qualify for a home loan, it’s important to realize that a lower credit score will make the cost of your homeowners insurance go up and your interest rate will be higher. Lowering the amount available for principal payment and ultimately, lowering the price of the home you can qualify for. Conversely, a higher score will have the opposite effect, helping to lower the cost of your homeowners insurance and giving you access to more favorable terms and interest rates. Therefore may help you to qualify for “more house” with a similar payment.
26.  Whose credit score is used on a joint mortgage?

If two people are purchasing a home together the lender will use the lower score.

Here’s an example:
Applicant #1 has a credit score of 714.
Applicant #2 has a credit score of 610.
The lowest score is 610, so the lender will go with that.  If you or your spouse has a low credit score, then applying together may mean that you get turned down or it could mean you pay a higher interest rate. If you can get approved together and the cost is not significantly more, then you may want to get the loan together. There’s good reason to do so, because the new financing will help the spouse with the lower score build credit.
Now, If you are not approved together because of a low credit score, then the party with the highest credit score can apply for the loan in their name only, using just their credit score. However, keep in mind that the lender can only use that person’s income, and not the income of the entire household.

Additionally, even if you’re able to get approved together, but because one spouse’s credit score is low, it may mean you have a high interest rate. In this case it may be a good option for the party with the highest credit score to apply for the loan in their name only to see if you can get a lower rate.

The key is to figure out how much the difference in rate affects the cost of a loan. A higher interest rate not only affects the total cost of a loan, it can change the monthly payments too.
27.  Is it ever too late to build credit to buy a house?

Absolutely not! I have had a client go from 420 credit score to 620 in less than two years by hiring a credit repair company and paying down debts as fast as she could.  

Recently a friend reached out to me and was worried he should just give up his dream of owning a home because he had so many credit challenges!  I encouraged him to call a mortgage lender I knew.  She pulled his credit and gave him suggestions on what to do to increase his credit.  It could be less than one year until he can purchase a home if he follows the directions the lender gave him. 

The key is to follow their directions to a “T”. If they say pay your credit cards down to $10 dollars, do it! Because paying it off may not give you the boost that you need. There are so many different options when it comes to boosting your credit! So reach out to us and we will get you in touch with someone that can help you and your situation! Not all hope is lost.
28.  Credit repair company. 

Credit repair companies begin by requesting your credit report from the three major credit bureaus — Equifax, Experian and TransUnion. They’ll review each one for negative, or derogatory reports, such as collections, charge-offs, tax liens, or bankruptcy.

They may address these items on your behalf by requesting verification of the debts reported, send letters disputing incorrect negative items, negotiate with creditors to remove derogatory items, and may send cease-and-desist letters to debt collectors. Sometimes, they may recommend applying for new accounts to add positive information to your reports. If you’ve had trouble managing credit, a new account may not be the best option. 

This is very different from a credit consolidation company which we discussed at the beginning of these series about how that can decrease your credit. Credit repair companies do charge a monthly fee to help get your credit on track and do require you to send them information in a timely matter and interact often with them.  The first step before you contact a credit repair company is to contact a lender! 
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