There are a few surprises that can disrupt your home purchase. Can you imagine finding the home of your dreams, one that meets all of your needs and most of your wants, only to discover you can't buy it? There are a number of things that can cause this catastrophe. One common surprise that can ruin a home purchase is a bad credit score.
Knowing how your credit score is calculated can help you protect your score. That way you will not be surprised when you seek qualification for your home purchase. Most credit scores range between 300 and 850. To get a mortgage you'll want to maintain at least a 620, depending on your financing.
Here are the 5 Factors Affecting Your Credit Score
1. Types of Credit: 10% of your credit score is based on the type of credit you have. Installment debt (auto loan, home loan, student loan, etc.) is considered better debt than Revolving debt (credit cards). You also get points for demonstrating your ability to keep up with multiple types of debt.
2. Payment history: Are you paying your bills on time? This is the most important factor in determining your credit score. 35% of your score comes from your history of paying bills on time. If you were late, how late were you? Not only will doing a Short Sale affect your credit, but any late payments will also increase the impact. Did you do a short sale? Give me a call and we can evaluate your timeline for buying your next home.
3. Credit history: A long history with credit demonstrates consistent dependability. The longer you have had accounts opened, the better. 15% of your score is based on the length of your credit history. Keeping accounts open for 7 years will improve your score. However, make sure you are using the credit and paying it off on time.
4. Credit amount: Another 30% of your score is based on how much credit you have. If you owe a great deal of money on numerous accounts, lenders could consider you as overextended. However, it’s a good thing if you have a good proportion of balances to total credit limits. This means don't max out your cards. It is better to have less than 33% of the maximum balance on multiple cards, then one or two that are maxed out. Again, make sure you can monitor your cards and make payments on time.
5. New credit: New credit is seen as risky because lenders don't know how it will affect your ability to pay your obligations. When you look into getting new debt it will temporarily ding your credit. These inquiries affect your score by 10%. When you're shopping for a house these credit inquiries will be grouped into one as long as they are within 30 days of each other. If you buy a car right before buying a home, your credit will be hurt, and you may no longer qualify for your mortgage.
Utah Dave - Daybreak Neighboorhood Expert and Local Resident