Credit Scores and a home loan
A credit score is the number that many people worry too much about, and many people don’t worry enough about. Being in the mortgage industry, we see a wide range of credit scores, and a wide range of attitudes regarding personal credit scores.
The stereotypical perfectionist can’t seem to get their score high enough, a person facing unforeseen financial circumstances is afraid of their score dropping too much, and the up and coming generation can’t seem to build enough credit history to overcome some unwise youthful decisions. Let’s take a look at each of these three example and see how they relate to buying a home.
Yes it’s possible to get your score up over 800, but is it worth it? It is not very often that we see borrowers with scores over 800. In most cases, to get such a high score, a person has to actively work to get it there. Some consumers accomplish this by hiring companies to evaluate their score and the company then gives options to improve it, even though their score is already at an industry high. So why all the fuss?
Banks will give borrowers a better interest rate for higher credit scores, but like any other grading curve, when you reach the mark, going higher doesn’t do you any good. Most banks and lenders give the biggest benefit to borrowers with a mid-score of 760 or higher. That means borrower “x” with a credit score of 762 will get the same interest rate break for their score as borrower “y” with a score of 810.
If this is you, you are there, congratulations! Continue paying your bills on time and practicing basic accountability with your finances. Obviously having a high score makes buying a home easier, but it can still be done with a less than perfect score. So please continue reading.
The Unforeseen Event
Sometimes bad things happen to good people, some of life’s biggest financial curveballs are un-employments, disability, illness, divorce and other situations that limit the ability to pay bills. These are concerns for banks evaluating someone looking to buy a home. Your payment history, good or bad, will be reflected by your credit score from the trade lines on your credit report. How you deal with these circumstances tells a bank a lot about the kind of risk you’ll be.
Banks and lenders are looking for layers of risk in your credit and that is why they establish guidelines to evaluate your ability to repay a loan. Remember, a loan is a product banks create, and your credit score is a barometer. We can’t all be Dave Ramsey, but we can do damage control when the unexpected happens. Seek out someone you trust and make a plan. Keep in mind the journey starts when you take the first step.
Up and Comers
Also known as Millennials, this up and coming generation may have made a few poor financial decisions and their credit suffers as a result. Fortunately the damage does not need to be permanent; with some good credit use information and a few years of responsible credit use this group can overcome youthful shortcomings and still own a home.
If you, or someone you know is currently in that stage of life, where credit cards and car loans are almost too hard to resist, remember that the consequences can linger for several years. It’s helpful to ask yourself, “where do I want to be in five years and what choices do I need to make to get there?” Or let me paint a possible picture, where your spouse makes you sleep on the couch because he/she found out that your credit history was so poor that no lender would touch you for another 12 months because of your current or past choices. If your couch is like mine, you will end up with a sore back. Don’t put yourself in that situation.
Your credit score and credit report can be a tool for adding strength to your mortgage application. On the other hand, a poor credit score can hurt your chances of getting a mortgage. There’s no need to dedicate your life to improving your score, but you do need to be cognizant of it. And remember if you have questions seek out answers.