Straight Talk About Credit Scores

Straight Talk About Credit Scores

It should not come as a shock that unless you happen to have a very large pile of cash with which to purchase a home, you will need to qualify for a mortgage as part of your progress to becoming a homeowner. We always send clients to get prequalified for a mortgage as the very first step when they seek out our real estate services, and that is precisely why: if you can't get a mortgage (and don't have the elusive spare pile of cash) then we aren't going to be able to move your homebuying process along.  (And once you DO qualify, it lets us know what price range you will be considering, also fundamental to the house-hunting equation.)

Because lenders need to be selective about their clientele in order to stay financially viable as businesses, they use prospective borrowers' credit scores to help guard the loan against future loss.

Of course, they also weigh other factors in deciding whether to offer you a loan: job history, past positive credit history, and so on. Your credit score can make a huge difference, though.  It's worth understanding how your credit score is calculated, because you'll see what factors you might be able to improve upon, in order to see a rise in score - and secure the house of your dreams!

5 Factors That Determine Your Credit Score is a very comprehensive article from The Balance, and worth the click to read through.  Of particular importance is this chart:

So as you can see, the bulk - Payment History and Amounts Owed - reflect what could be called the Habit factors of your credit life.  It's things like paying your bills on time, and how much debt you have vs paid off debt.  This is the part to focus on, if your current credit score is not good enough for a mortgage:  get serious about getting bills paid on time, and get serious about paying down balances.  Lenders often prefer to see a debt utilization under 30% - which means of the credit available for your use, less than 30% is really used. A lender will see your reformed efforts reflected over time, and see you as a serious client. 

This often goes hand in hand with our advice to clients to save more for a down payment and closing costs: while you're doing that, you will need to mindful of polishing your credit, too.  It can amount to having to double your belt-tightening efforts, if you are both saving more and paying more down on your debt.  (And try to find novel ways to temporarily increase your income for the term, too - you can dedicate all of your side income stream to savings and debt reduction, and then you won't miss the income when you stop the current savings/debt reduction project.)

If you are struggling to repair your credit, you can consider credit counseling services, but be very careful.  Many services are not reputable.  Get references from your trusted bank or credit union, and read reviews and references carefully. There are groups dedicated to self-help credit repair, and it may be worth a look.  One long running site with a good reputation is Credit Info Center. Look for a nonprofit credit counseling service.  Hit up the library for books on personal finance while you work on things.  You'll come out the other side in better shape, and smarter about credit and savings going forward.

The payoff is worth the brief season of penny pinching:  you'll be in a position to get a mortgage, and move forward with your home owner dreams.  The improved credit score will me you can qualify for lower lending rates, which in turn mean you can effectively afford a bigger mortgage - and more house!  When you're in a good place to move forward with your real estate dreams, give us a ring at Dupuis Team - we can't wait to help make your hard won dreams come true.

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