Marc LeBlanc's Blog
If you are thinking of buying a home in the near future, there’s one three-digit number that could be oh so important to you. That number is your credit score. Read on to find out how a credit score can affect you and the steps you can take to be sure that your credit is in good standing when you head to apply for a mortgage.
What Is A Credit Score?
Your credit score is checked by lenders of all kinds. Every time you apply for a loan or a credit card, there’s a good chance that your credit score is being pulled to see if you qualify for the loan. Your credit score is calculated based on the information on your credit report. This information includes:
Length of credit history
New credit accounts opened
The areas with the most impact on your score is your payment history and your debt-to-credit ratio. This means that on-time payments are super important. You also don’t want to get anywhere close to maxing out your credit cards or loan amounts to keep your score up.
What’s A Good Score?
If you’re aiming for the perfect credit score, it’s 850. Most consumers won’t reach that state of perfection. That’s, OK because you don’t have to be perfect to buy a house. If your score is 740 and above, know that you’re in great shape to get a mortgage. Even if your score is below 740 but around 700 or above, you’ll be able to get a good interest rate on your mortgage. Most lenders typically look for a score of 620 and above. Keep in mind that the higher your credit score the better your interest rate will be.
What If You Lack Credit History?
Most people should get a credit card around age 20 in order to begin building credit. You can still qualify for a mortgage without a credit history, but it will be considerably harder. Lenders may look at things like your rent payments or car payments. Lenders want to know that you’re a responsible person to lend to.
What If Your Score Needs Help?
It doesn’t mean you’re a hopeless case if you lack good credit. Everything from errors on your credit report to missed payments can be fixed. The most important thing that you can do if you’re buying a home in the near future is to be mindful of your credit. Keep an eye on your credit report and continue to make timely payments. With a bit of focus, you’ll be well on your way to securing a mortgage for the home of your dreams.
Going through the process of applying for a mortgage only for your application to get denied can be a frustrating and confusing time. If you’re hoping to buy your own home in the near future, it’s vital to secure financing or you risk missing out on a home that you may have been depending on getting.
In today’s post, we’re going to talk about what happens when your mortgage application is denied and what you can do to fix the problem as quickly as possible.
Determine the Cause of Denial
If your application is denied, priority number one needs to be to understand what happened. Since lenders are required to provide denied applicants with a letter explaining why they were denied, this just means reading the letter and making sure you understand all of the reasons listed.
There are a few common reasons that an application may be denied. Some of them are simple fixes, while others might require time and effort on your part that may delay your house hunt for a while.
One issue that many mortgage applicants have to handle is when their employer won’t provide proof of income to a mortgage lender. Since income verification is vital to the mortgage application process, it’s important to make sure you can provide all of your income details from the last 2 years to the lender.
Sometimes there are issues with contacting employers, such as when your former place of employment goes out of business. Or, you may be a freelance or contract worker with atypical forms of income verification. Regardless, make sure you are clear with your loan officer regarding your employment history.
Other common causes for denial of an application include problems with your down payment (such as not meeting the required down payment amount) and credit history issues, such as having a lower score than you thought.
Credit score lower than expected
It’s not uncommon for a lender to run a credit check and come up with a score that is lower than you anticipated. Since scores change on a monthly basis, and since there are differences between the scores provided by the three major credit bureaus, you might find that your lender found a score slightly lower than what thought.
If the score is drastically different, however, this could be a sign of two things. First, make sure that you haven’t recently made multiple credit inquiries (such as applying to several lenders who perform credit checks) or by opening new credit cards or loans. These inquiries temporarily lower your credit score.
If you haven’t recently made any inquiries (other than applying for a mortgage with your lender of choice), then it’s a good idea to get a detailed credit report and scrutinize it for errors. Inaccuracies on your credit report can be disputed and resolved and can give your score the boost you need to be competitive on your mortgage application.
Choosing a different lender
While most lenders use similar criteria in determining your borrowing eligibility, there are some differences between lenders.
For example, some lenders might take on more risk by lending to someone with a lower credit score. However, they will also likely require a higher interest rate in exchange for the added risk they’ve acquired.
Now that you know your options for what to do when an application is denied, you’re well-equipped to start tackling the issue and getting back on track to becoming a homeowner.
For those who want to acquire a house, it helps to get your finances in order. That way, you can quickly and effortlessly navigate the homebuying journey without having to worry about how you'll afford your dream house.
There are many quick, easy ways to straighten out your finances before you embark on the homebuying journey, such as:
1. Assess Your Credit Score
Your credit score ultimately can play a major role in your ability to secure a great mortgage. If you understand your credit score, you may be able to find ways to improve it prior to conducting a home search.
It is important to remember that you are entitled to a free copy of your credit report annually from each of the credit reporting agencies (Equifax, Experian and TransUnion). Request a free copy of your credit report today, and you can take the first step to evaluate your credit score.
If you find that your credit score is low, there is no need to worry. You can always pay off outstanding debt to improve your credit score over time.
Also, if you identify any errors on your credit report, you'll want to address these mistakes immediately. In this scenario, you should contact the agency that provided the report to ensure any necessary corrections can be made.
2. Look Closely at Your Monthly Expenses
When it comes to buying a house, it generally helps to have sufficient funds for a down payment. The down payment on a house may fall between 5 and 20 percent of a home's sale price, so you'll want to have enough money available to cover this total for your dream residence.
If you evaluate your monthly expenses, you may be able to find ways to save money for a down payment on a house.
For example, it may be beneficial to cut out cable TV for the time being and use the money that you save toward a home down payment. Or, if your dine out frequently, cooking at home may prove to be a substantial money-saver that could help you speed up the process of saving for a down payment.
3. Get Pre-Approved for a Mortgage
With pre-approval for a mortgage, you can enter the housing market with a budget in hand. Then, you'll be better equipped than ever before to narrow your search to houses that fall within your price range.
To get pre-approved for a mortgage, you'll want to meet with banks and credit unions. These financial institutions can teach you about different mortgage options and help you assess all of the options at your disposal.
Furthermore, don't hesitate to ask banks and credit unions about how different types of mortgages work. This will enable you to gain the insights that you need to make an informed decision about a mortgage based on your financial situation.
If you need extra help as you prepare to pursue a house, you may want to hire a real estate agent as well. In fact, a real estate agent can help you find a high-quality house at a budget-friendly price in no time at all.
Everyone knows that their credit score will affect the mortgage they qualify for and the interest rate they receive. The details of how exactly those numbers are arrived at, however, are a bit hazy for the average prospective homeowner.
This confusion is due to a number of reasons. Chief among them is the fact that your average person isn’t well-versed in credit terminology or the variables that go into determining their credit scores.
In this article, I’m going to break down credit scores and credit bureaus, then discuss how each of them affects the mortgage rate you could receive. Then, we’ll talk about some ways you can boost your score to qualify for a better rate.
Anatomy of a credit score
Credit scores are determined by five main variables. In order of importance, they are:
35%: your payment history on loans, bills, credit cards, etc.
30%: your total debt amount for all of your accounts
15%: length of your credit history (how long you’ve had open accounts for loans, credit cards, etc.)
10%: types of credit you have used (auto loan, student loan, credit card… diversity of loans matters)
10%: recent credit inquiries (such as taking out new loans or opening new credit cards)
To have a “good” (over 700) or “excellent” (over 750) credit score, you’ll need to focus on each of these factors. For most people, paying their bills on time over a long enough timeline is enough to get them into the excellent range.
But things happen in life. People forget to pay an important bill, they have financial emergencies, or they have to take out a loan for an unforeseeable expense.
The credit bureaus
So, who are the people that determine your credit score?
There are three main credit bureaus: Experian, TransUnion, and Equifax. Lenders will look at reports from all three bureaus to determine your rate. Due to the Fair and Accurate Credit Transactions Act of 2003, consumers are able to receive a free copy of their credit report from each bureau once per year.
Since then, companies like Credit Karma have made credit reports even more accessible. Users are able to check in on their credit as often as they want free of charge.
Since much of your credit score is out of your hands, at least in the short-term, what can you do to help boost your score over the next few months to increase your chances of getting a good interest rate on your loan? Two things.
Credit and mortgages
So, just how much of an impact does your credit score have on your mortgage rate? Having an excellent score can give you a full percentage point lower on your monthly interest rate.
One percent doesn’t seem like much, but over the period of a 30-year loan that can amount to tens of thousands of dollars that you could have saved if you had a better credit score. As you can imagine, having an extra $2,000 per year can be quite helpful to a new homeowner.
So, what can you do to boost your score?
Since you have access to free credit reports be sure to go through your detailed report a few months before you plan to apply for a mortgage. Report any harmful errors to help you increase your score.
Don’t apply for new credit
The period from now until you apply for a mortgage is an important one. If you make new credit inquiries (i.e., open up new credit cards, take out new loans, etc.), your score will temporarily decrease. Wait until after you sign on your mortgage to take out other loans.
Many Americans who purchased their home when they had lower credit, a shorter employment history, and less money stand to gain from refinancing their mortgages. However, most miss out on this opportunity or don’t realize it in time to save potentially thousands in interest payments.
According to recent data, 5.2 million Americans could save, on average, $215 per month if they refinanced their loan. But many homeowners are hesitant to refinance.
Whether it’s because of the inconvenience, the cost of refinancing, the worries about something going wrong, or uncertainty about whether they’ll actually save money if they go through the process, millions of homeowners are missing out.
So, in this article, we’re going to talk about some reasons it may be a good idea for you to refinance. If you’re one of the millions of Americans with a mortgage who are thinking about refinancing, this post is for you.
Riding the wave of the economy
Interest rates on home loans are historically low right now. As a result, homeowners can save by refinancing simply due to changing tides of the real estate market. Although mortgage rates have increased slightly over the past two years, they’re still on the low end, so this could be your last chance to save.
To consolidate your debt
Credit cards, auto loans, and other forms of debt can add up quickly. If you have a high-interest rate on your other debts, refinancing could be a good way to consolidate and save.
This can be achieved through a home equity loan or by refinancing with a cash-out option. This means you refinance your mortgage for more than you currently owe and take the remainder in cash to pay off your other debts with high-interest payments.
Typically, you need to have at least 20% equity (or have paid off 20% of your mortgage) to be eligible for this option.
Small percentages count for more now
It was once said that refinancing only made sense if you would receive a lower interest rate of at least 1-2%. However, with the prices of homes increasing over the years, sometimes even a small change, such as .75% is enough to save you substantial money on your repayment.
You’re able to repay early
One of the best ways to save on a home loan is by refinancing to a shorter term. Going from a 30-year loan to a 15-year loan can save you thousands. There are several calculators available for free online that will enable you to estimate how much you could save by refinancing to a 15-year mortgage.
You got a raise
One of the best times to refinance is when you can be certain that you can afford to pay off your loan sooner. As people progress in their career, it isn’t uncommon for them to refinance their loan so that they can spend more each month but save in the long run.
Since you have a higher income, and likely higher credit, you can also refinance a variable rate loan to lock in a lower fixed rate.