Triangle Area Real Estate News & Information

Most of us who wish to buy a home will do so by getting a mortgage. The first requirement is that we manage to save up enough money for a down payment. In addition, there are many other costs when purchasing a home — collectively referred to as “closing costs” which may include: mortgage application fees, attorney fees, inspection fees, home owners and title insurance, property tax and possibly homeowner association pro-rations, filing fees, and others. Equally important is having a good enough credit score to qualify for a mortgage and, unlike saving up your money which everyone understands, very often many people don't really understand how this works and what it will mean and how to improve their scores. If you are one of these folks, this is the information you need.

I spoke with several of my preferred mortgage lenders all of whom work with different lenders, both traditional banks as well as credit unions, in an effort to educate myself on how the credit scoring system works. Here's what I learned.

Credit Score Factors That Are Integral To Mortgage Approval

The single most important thing you can do in order to maintain a good score (or build your score up) is to make your payments on time. I've been told that payment history counts for roughly 35% of your total credit score. From a lender's perspective if you've recently missed or been continually late making payments, they feel that this is going to continue and will probably result on your defaulting on your loan. Whether this is entirely true is open to debate, but rest assured this is how it's viewed. They also calculate severity; in other words how late did you pay the minimum amount (or more than what was required) and how late was your payment? They will also factor in how often you're late with payments. Anytime a creditor starts the collection process, rest assured your credit is going to take a significant ding. You need to make your payments on time.

The next biggest part of their calculations (approximately 30%) is how much you owe. What they’re measuring is how “maxed out” you are. It's less about the actual amount you owe and mainly about what percentage of your available credit is being used. Most of the lenders I spoke with said if you're not able to pay your bill in full every month, you really need to focus on not carrying more than 50% of your available credit line. They feel much better (and your score will be much better off) if they believe that you have an ample cushion in case of an emergency. Even though it makes very little sense to me, this is why credit counselors advise not closing out credit cards you may not be using. The more access to credit you have the higher your score will be.

As you can see these two item account for two thirds of your credit score. The remainder is comprised of three items. The first is the length of time you've had credit. The longer you've had credit the better, as they assume you've learned how to manage your credit over time. This is why it's important to begin developing your credit early on and manage it wisely. I've been told this accounts for 15% of your total score and is another reason why you don't want to close out old accounts. The fact that you owe nothing on them matters less than the fact that you've had them and used them responsibly over time. The second item is the type of credit you have. Installment loans (mortgages, car loans, furniture loans, etc.) are better than credit or charge card loans as installment loan eventually get zeroed out while charge cards tend to go up and down. The final thing they consider is how often you're out looking for credit. While your credit score will get dinged each time you apply for a new credit card, shopping for a mortgage will not affect it the same way. Multiple credit checks by mortgage lenders are viewed as one inquiry. The presumption is if you’re looking for credit cards you need credit and it should come as no surprise that they would rather lend to people they feel aren't in need.

Good Credits Scores Can Save You Money

To give you some idea of just how important your credit score is when seeking a mortgage consider this: With 20% down the difference between having a credit score of 740 and 640 will cost you between 2.5% and 3% in terms of the cost of getting your loan. For a $200,000 loan this means a person with a score of 740 or above will save $5000 - $6000 over a person with a score of 640.

Everyone is entitled once a year to a free credit report. There is only one government-approved site to get your free report and it's AnnualCreitReport.com. You should take advantage of this each and every year to maintain your credit so that you get the best possible offers when you're ready to buy a home.

Larry and MyNcHomes have been helping people buy and sell homes in Durham, Chapel Hill, and Hillsboro areas for a number of years. If you're wondering where you go for your mortgage, get in touch with them online or by phone at 919-659-5173 and they'll be happy to refer you to their preferred lenders.