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Your Credit and Home Buying

To get ready to buy a house one of the very first things you should do is check your credit rating and credit score. In most cases, you will need to take out a mortgage to pay for your new home. Your credit score is the most important factor in determining what interest rate you will pay for your mortgage or if you can get a mortgage.

Credit Bureaus

The information in your credit report is gathered by reporting agencies called credit bureaus who then offer it to potential creditors. The three main credit agencies are Equifax: , 1-800-685-1111 TransUnion: 1-800-888-4213, and Experian: 1 888 397 3742. A creditor will make a decision about you with regards to your credit risk by looking at these companies’ reports. To better analyze your credit, you are assigned a credit score, a three-digit number that takes into account all of your credit history. The numbers range from 300-850; the higher the number indicating a better credit  risk. 

                                                                                                                                          

How is your Credit Score Determined?                                                                                 Points are assigned based on items in your credit history. Your resulting score is compared to those of other consumers with similar profiles. With this information, mortgage lenders have a pretty good idea of how likely somebody is to repay their loan on time. There are different scoring methods out there but the most common is known as a FICO score. The name comes from an independent company who created it; Fair Isaac and Company. This is how the score is calculated:

                         Payment.                                                                                                                                          HistoryAccount payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.)

· Presence of adverse public records (bankruptcy, judgements, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items)

· Severity of delinquency (how long past due)

· Amount past due on delinquent accounts or collection items

· Time since (recency of) past due items (delinquency), adverse public records (if any), or collection items (if any)

· Number of past due items on file

· Number of accounts paid as agreed

Amounts Owed

· Amount owing on accounts

· Amount owing on specific types of accounts

· Lack of a specific type of balance, in some cases

· Number of accounts with balances

· Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)

· Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans)

Length of Credit History

· Time since accounts opened

· Time since accounts opened, by specific type of account

· Time since account activity

New Credit

· Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account

· Number of recent credit inquiries

· Time since recent account opening(s), by type of account

· Time since credit inquiry(s)

· Re-establishment of positive credit history following past payment problems

Types of Credit Used

· Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.)

Please note that:

· A FICO score takes into consideration all these categories of information, not just one or two.
No one piece of information or factor alone will determine your score.

· Your FICO score only looks at information in your credit report.
However, lenders look at many things when making a credit decision including your income, how long you have worked at your present job and the kind of credit you are requesting.

· Your score considers both positive and negative information in your credit report.
Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your FICO credit score.

The number and types of inquiries also play a role in determining your score. P If too many new credit inquiries exist, this may indicate to the lender that you are preparing to go into additional debt by taking out new loans. This is why we recommend you wait until after buying a home to finance a car, electronics, furniture, appliances or anything on credit. Fortunately, mortgage inquiries do not fall into this category. All inquiries from mortgage lenders within a 30-day period count as one inquiry.

 

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Here is more about credit.....how to improve poor credit...divorce and credit...

Improving Poor Credit

If you have fallen behind in your payments, begin immediately to repair your credit record. Here's how:

  • Face up to the problem. Recognize that you are overextended, and contact your creditors to see if they will set up a new payment schedule that you can maintain. In any case, don't ignore your bills.
  • Immediately stop purchasing with credit. Take your credit cards out of your wallet. Store them in a spot that is hard to reach, or even cut them up.
  • Consider consolidating debts. You may find it easier to make a single payment rather than several. You might also get a lower interest rate that will make it easier to keep up with payments. Remember that debt consolidation is not a cure-all. You have to learn to control your spending to avoid future debt.
  • Contact a credit counseling organization. You can obtain referrals for organizations in your area through the National Foundation for Consumer Credit, (800) 388-2227.
  • Don't expect miracles. Don't believe companies that promise to fix a poor credit rating quickly and painlessly for a fee. As long as it is accurate and timely, negative information cannot be removed from your credit record. The only way to improve a credit record is to let time pass and establish a record of on-time payment.

Divorce and Credit

Aside from its non-financial effects, divorce can cause problems with your credit record. The end of a marriage does not erase the debts you and your former spouse took on as a couple. Even if your former spouse is ordered by the court to pay debts from the marriage, you can become liable if they are not paid. Here are a few suggestions to protect your financial standing:

  • Decide how to divide or dispose of property. If necessary, you can use a mediator to work through this with your former spouse.
  • Close or separate joint accounts. Decide with your former spouse who will be responsible for paying bills, and notify your creditors of your divorce.
  • Establish independent credit, if you do not already have it.
  • Make sure bills are paid.

Paying Off a Loan Early

If you are applying for a loan and think you may want to pay it off before it has run its full term, you should be aware that lenders have several methods of calculating interest. The method they use affects the amount you will owe if you decide to pay off early. Since lenders are not required to disclose which method they use, you may have to ask. Here is a brief description of the most common interest-calculation methods.

Rule of 78

This method uses tables based on a mathematical formula to determine how much interest you have paid at any point during a loan. It requires that you pay more interest at the beginning of a loan when you have the use of more of the money and that you pay less interest as the debt is reduced. Since all of your payments are the same in amount, the amount of your payment that is going toward the principal increases while the amount going toward interest decreases. State law may mandate the use of the Rule of 78.

Generally, the longer the term of a loan and the higher the interest rate, the less favorable the Rule of 78 is to borrowers who wish to pay off early. However, for loans of less than five years and with interest lower than 15 percent, the payoff calculated by the Rule of 78 is similar to that calculated with the actuarial method, described below.

Actuarial Method

This method is most often used for mortgages and other loans in which a periodic rate is applied to a declining balance. It does not take into consideration whether a payment is made before or after the due date. Late payments are subject to a flat penalty, but interest does not continue to accrue.

Daily Simple Interest

In this method, a daily periodic rate is applied to an outstanding balance. Therefore, borrowers benefit by reducing the outstanding balance through early payments or lump-sum payments, both of which reduce the balance and the interest due. Under a simple interest system, late payers will end up owing more.

 

Call Pat for additional help with your questions and possible solutions:  919-469-6530