Your Credit Score What It Means to You as a Prospective Home Buyer
The subject of credit scoring has become an increasingly hot topic and for good reason. For many years, the general public only associated the concept of credit scoring with the need to purchase high ticket items such as a new car or a home. Today, credit scoring goes much further. Your credit score can affect your ability to get a good rate on commodities such as car insurance, cell phones or even determine whether or not you get the job or promotion that you want or deserve. Indeed, the financial snapshot provided by the credit score has also become a gauge for many employers, especially those who seek to place employees in a position of management or financial responsibility.
Why Your Credit Score is So Important
The scoring model seeks to quantify the likelihood of a consumer to pay off debt without being more than 90 days late at any time in the future. Credit scores can range between a low score of 300 and a high score of 850. The higher the score, the better it is for the consumer, because a high credit score can translate into a lower interest rate. This can save literally thousands of dollars in financing fees over the life of a loan.
Only one out a 1,300 people in the United States has a credit score above 800. These are people with a stellar credit rating that get the best interest rate., On the other hand, one out of every eight prospective home buyers is faced with the possibility that they may not qualify for the home loan they want because they have a score falling between 500 and 600.
The Five Factors of Credit Scoring
Credit scores are comprised of five factors. Points are awarded for each component, and a high score is most favorable. The factors are listed in order of importance.
Payment History – 35% Impact
Paying debt on time and in full has the greatest positive impact on your credit score. Late payments, judgments and charge-offs all have a negative impact. Delinquencies that have occurred in the last two years carry more weight than older items.
Outstanding Credit Card Balances – 30% Impact
This factor marks the ratio between the outstanding balance and available credit. Ideally, the consumer should make an effort to keep balances as close to zero as possible, and definitely below 30% of the available credit limit as least 2 to 3 months prior to trying to purchase a home.
Credit History – 15% Impact
This portion of the credit score indicates the length of time since a particular credit line was established. A seasoned borrower will always be stronger in this area.
Type of Credit – 10% Impact
A mix of auto loans, credit cards and mortgages is more positive that a concentration of debt from credit cards only. You should always have 1 or 2 major credit card accounts.
Inquiries – 10% Impact
This percentage is the credit score quantifies that number of inquiries made on a consumer’s credit card within a 12-month period. East hard inquiry can cost from between 2 to 25 points on a credit score, but the maximum number of inquiries that will reduce the score is 10. In other words, 11 or more inquiries within a 6-to 12-month period will have no further impact on a borrower’s credit score. Note that if you pull a credit report yourself, it will have no effect on your score.
Remember that the credit score is a computerized calculation. Personal factors are not taken into consideration when a credit report is generated. IT is merely a snapshot of today’s credit profile for any given borrower, and it can fluctuate dramatically within the course of a week.
How Does a Low Credit Score Affect My Interest Rate?
Lenders estimate your ability to pay back money based on your credit score. The risk factor they take on is built in to your interest rate as a financing fee. Therefore, a low credit score results in a higher interest rate, and a higher amount of interest being paid over the total life of the loan.
A borrower with a credit score of 620 would be questionable to an underwriter. While the lender may agree to provide3 financing, the increased interest rate is factored into the monthly payment. The following chart illustrates the difference in the amount of interest paid over the life of the same loan with three different credit score scenarios.
30-year Fixed Rate with a Principal Loan Amount of $250,000
FICO Score APR Monthly Payment Interest Paid
Above 720 4.990% $1,341 $232,590
700-719 5.115% $1,360 $239,485
657-699 5.653% $1,444 $269,683
620-674 6.80% $1,630 $336,913
Below 620 People with scores below 620 aren’t usually accepted for this type of loan any longer