Your credit score is like a report card on how you manage your finances, and just as it is important to have A’s and B’s on your report card, it’s important to have a good credit score. Not only can your score play a role in whether you can get a loan, it also may affect what you pay for insurance and the amount of deposit you have to put down on an apartment. If your credit score is lower than it should be, you can follow these tips to give it a boost.
Bring past-due accounts current
One of the best and easiest ways to boost your credit score is to get current on any past-due accounts. If you are applying for a mortgage to check with the mortgage company first before paying any collections or charge offs. These accounts may not need to be paid before the loan is done and paying off old collections or charge offs will bring your scores down temporarily, or until they show some history of being paid and could cause a problem with getting the loan.
Accounts that haven’t been paid on time can greatly reduce your credit score, because your payment history accounts for more than one-third of your total score. If you have any accounts that are in collections, pay those off first and make sure the collections agency notifies that credit bureaus that you are now current. Then concentrate on bringing other accounts up to current status. One key thing to focus on, however, is that you want to make sure you don’t let any new accounts become past due while you are catching up on accounts that are already behind.
Pay down debt
Once you have worked to get all your credit accounts current, your next focus should be on paying down debt. The amount you owe makes up 30 percent of your credit score, and if you owe a lot relative to how much credit you have available, then it will affect your score. A general rule of thumb is your debt should be less than 30 percent of the amount of credit you have available. So if you have $10,000 worth of available credit, you should owe less than $3,000. This rule applies only to revolving credit accounts like credit cards, not to installment loans such as a car loan.
Don’t close accounts
If you pay off an account, you may be tempted to close it, but that can hurt your score, especially if the account has been open for a long time. The length of your credit history accounts for 15 percent of your credit score, so if you cancel accounts you have had for a long time, it can shorten your history and hurt your score. Keeping accounts open, even after they are paid off, will help boost your score.
Don’t open new accounts
The more credit cards you have, the more it can lower your score, especially if you have opened a lot of accounts recently. Opening a lot of accounts in a short time looks risky to lenders and can hurt your score. Doing so also can shorten your credit history, which can reduce your score as well.
In the housing market, it’s common to hear the term “refinancing” come up amongst homeowners. In short, refinancing is the act of paying off an existing mortgage loan and getting a new one to replace it. As with any major financial decision, there are upsides and downsides to refinancing a mortgage, and mortgage holders will look into refinancing for a number of different reasons. The end goal however is always the same: to save some money on some aspect of the loan.
Here are a few of the most common reasons for refinancing:
Switching Between Fixed and Adjustable Rates
There are benefits to starting out with fixed rate mortgages and adjustable mortgages, when first taking out a mortgage loan. But those benefits may erode over time, depending on the state of the market.
If the mortgage holder started out with a fixed rate mortgage loan, it may make sense to start looking into refinancing if the interest rates in the market begin to fall. If it looks as though market interest rates will continue to fall over an extended period of time, switching to an adjustable rate mortgage (ARM) would make sense. With an adjustable rate mortgage, there are periodic rate adjustments (that can adjust up or down). The falling rates in the market would result in both a lower interest rate and a smaller monthly payment for holders of an adjustable rate mortgage.
Important Note: Refinancing to an adjustable rate mortgage needs to be heavily considered by the mortgage holder. If they are only considering staying in the home for a few years, then switching to an ARM in a falling interest market makes sense. But, it’s possible for the rates to increase again over time, so that must be taken into consideration.
Conversely, if the mortgage holder started out with an adjustable rate mortgage, it’s possible for the market to enter a state of steadily climbing interest rates. In this situation, periodic adjustments to the mortgage will result in increased interest rates over time. It would make sense for the ARM to be refinanced to a lower, fixed rate mortgage to avoid continued hikes in the interest rate.
Reducing The Term of the Mortgage
Depending on the state of the market, refinancing to shorten the length of the mortgage is also an option. When there are “record low” interest rates, the loan holders may be presented with the opportunity to get out of a 25-30 year fixed rate mortgage. Refinancing to a lower interest rate can result in a shorter overall term, with a monthly payment that’s around the same as what was already being paid.
Check back soon for more information on mortgage refinacing!
According to the Mortgage Bankers Association’s National Delinquency Survey, foreclosure starts have decreased across the board, in the first quarter of 2016.
The Mortgage Bankers Association (MBA) is one of the most reputable and highly recognized sources for data on the residential delinquency and foreclosure rates. For their National Delinquency Survey, 120 mortgage lenders are observed. They sample 41.6 million mortgage loans that are given out by institutions such as banks, credit unions, and mortgage companies. The MBA then proceeds to review and report on both the delinquency rates and foreclosure rates that they observe throughout the sampling.
One of the most significant rates to decrease was the percentage of loans where the action to foreclose was started. In the first quarter of 2016, the rate is 35%, which is down 10 points from 2015 and is the lowest level since the second quarter of 2000. (source)
This downturn in foreclosure can be attributed to two major shifts. One, the qualifications and guidelines for getting a mortgage loan have become much more stringent since the recession of 2008. The Dodd-Frank Wall Street Reform and Consumer Protection Act was put into place under Obama’s presidency; it was a huge reform that was designed to temper and prevent risky business practices by a variety of financial institutions. Under the Dodd-Frank Act, The Consumer Financial Protection Bureau was established to provide regulation over mortgage lenders and brokers. One of the major side effects of that act was the implementation of protections of families from exploitive measures by lenders and mortgage companies.
The second shift took place on the consumer end. After feeling the effects of recession, consumers looking to buy a home have begun to seek education on the real estate market, before reaching out to apply for the loan. More resources have become available on predatory lending, and consumers are now willing and able to arm themselves with that knowledge before moving forward.
As the decrease in foreclosure starts continues, the whole lending market will begin to shift focus. The focus for the past few years has perpetually been stuck on reducing risk. But with the reduction of foreclosures now being evident, lenders will be able to start focusing on expanding access to credit. Their goal can now be on continuing this positive momentum, and creating traction for a new housing boom.
In my last post, I started a list of things that you should absolutely consider before purchasing your first home. Buying a home is a major live achievement, and you’ll want to make sure that everything goes as smoothly as possible, so your achievement doesn’t turn into a source of deep personal and financial strife.
Let’s delve a little further into some other important things to think about before you sign on the dotted line.
Don’t Buy A Home for the View
If you’re looking at a home, and the selling point is the view, you must remind yourself that that view may not be there forever. Markets shift, renovations happen, and new properties are built all of the time; those can easily obstruct or destroy the view that you loved so much.
Protip: If you really love the view, and you have the means…..try and buy the property that makes it up. This is really only applicable in rural, undeveloped areas, but it may be possible to purchase a small plot of the land that makes up the view that you love.
What Is The Long Term Plan?
There are a few things to consider when you’re thinking long term.
- The most obvious question is whether or not you are planning to grow your family. How many kids are you planning for? Will there be enough space? Is the layout of the house kid-friendly/safe?
- If this is just a “starter” house, and you’re planning to move and rent out this house: Make sure renting is allowed. There are some homeowner associations that contractually prohibit renting, so be aware of that before you buy.
- If this is just a “starter” house, and you’re planning on selling, determine who the house will appeal to when you’re trying to sell. Is this home going to appeal only to first time buyers or will families consider it too?
You’ll want to try to invest in a home that appeals to a broad market. So, consider things like school districts, proximity to amenities, & family-friendliness when purchasing because you don’t want to end up with a house that you can’t sell or lose money on because your potential buyer-pool is limited.
Coming to a position in life when you feel ready to purchase your first home is very exciting. Of course there will be a lot of planning and budgeting before any concrete decisions are made. But, there are certain things that many first-time buyers forget to even think about when planning out their big buy.
Use this as a checklist of things you should take into consideration when thinking about investing in a home.
Look Into Funding & Grants
You’d be surprised by the assistance available for potential buyers if you do the proper research. Many people are quick to assume they wouldn’t qualify for grants because of income limits, but that’s not always the case. There are a lot of associations that provide grants and assistance based on profession, so check for those first. Then, look into grants available specifically for the area/type of area that you are looking to live in.
Can You Handle a Financial Emergency?
I mentioned emergency funds in a past blog post in the context of bankruptcy prevention, but it absolutely bears repeating. If you are going to invest in a home, you must have a significant savings. If you lose your job, or there is a medical emergency, do you have enough saved to cover expenses and your mortgage for a few months?
First-time buyers who are transitioning from renting also often forget that all maintenance will now come out of pocket. Many homeowner insurances will have deductibles that you must hit before they pay for damages, so remember that there can be a lot of unplanned out-of-pocket expenses that come with owning a home.
Think About What Kind of Neighborhood You Want to Live in
It’s easy to be swept up into the whirlwind of house showings and open houses, and the last thing you want to do is fall in love with a house in an area that doesn’t align with your needs. One of the most important things to determine is whether or not the area is primarily renters or buyers. The high turnover of residents in rental properties means that the vibe of the neighborhood can shift very easily.
If you’re planning to have a family, there are also a few things to think about. What are the schools like? Are there a lot of other families in the area, or is it primarily single residents? Will there be resources for your children?
The desire to own a home is relatively universal, and once you decide it’s time to start looking at homes, a whole plethora of tasks begin to unfold in front of you. The average individual does not have hundreds of thousands of dollars of cash on hand, so the greatest task to tackle is getting approved for a mortgage. While lending companies may be willing to extend credit under certain circumstances, the reality of the situation is that the standards for being approved (quickly) for a mortgage are very high. There are a few things that you will need (and need to be aware of) when applying for a mortgage:
Strong & Lengthy Employment History
Lenders feel safer with lending when your recent employment history touts at least a 2 year stint at your most recent place of employment. The longer you’ve been working (and the smaller number of job hops that you have on your resume), the more trustworthy you become to banks.
Excellent Credit & Your Credit Reports
This is a bit of a no brainer; your credit score is one of the most important factor when it comes to being approved for a mortgage. Your FICO score can be in the 620-640 range to be approved for some loan programs, however a credit score of 720 or higher will lend itself to getting much better interest rates, which can equate to thousands of dollars saved over your lifetime.
Make sure to review all three of your credit reports before diving into the mortgage application process. An estimated 40% of credit reports contain errors that could be directly affecting your credit score. Make sure to get all discrepancies fixed as soon as possible.
Money Down & Cash on Hand
It is virtually impossible to get a loan without putting money down. The general rule is to be prepared to put down a minimum of 20% of the mortgage up front. It’s also important to remember that banks and lenders will also be checking your cash on hand. Lenders are weary of mortgage applicants that don’t have a significant enough savings; if a single emergency could clean out your savings, it is unlikely that you will get a mortgage.
Misc Important Documents:
- Records of your employment history for at least 2 years
- Records of your residence for at least 2 years
- Proof of Homeowner’s Insurance
- Pay Stubs from the last 2 months of employment
Used as a basis in determination for loans, credit cards and mortgages, credit scores play a vital role in any person’s credentials. Your credit score can literally mean the difference between being approved for a mortgage on your first home and being denied. Credit scores also plays a significant part in determining interest rates.
Your credit score is a generated mathematical algorithm that uses information from your credit report, as depicted on bankrate.com. Although there are various credit score models, most lenders use an applicant’s FICO score to determine their eligibility. According to FICO, “90 percent of all financial institutions in the U.S. use FICO scores in their decision-making process.”
There are 5 primary aspects in determining someone’s credit score: payment history, debts owed, length of credit history, new credit, and types of credit used. Each metric is weighted in different percentages against your score, with payment history and debts owed making up for more than half of your total score. Whether you are new to building credit or have a substantial number of years with credit also works as a factor in your credit score. Those who are new to credit have a different formula used than those who are not. Consumers with similar credit profiles have a formula designed for their category.
Although some lenders may have their own spectrum of what “a good credit score” is, creditkarma.com suggest a good score is anywhere between 700 and 850. Knowing your credit score is a crucial aspect in planning your financial success. Prior to applying for credit you should always review your score and know where you stand. There are various sites you can visit that specialize in managing your credit score. By doing so you have the opportunity to build your score and make yourself a more favorable applicant, thus setting yourself up for future financial success.