Credit market for home buyers is still full of twists and turns . Most lenders still have non-performing loans in their portfolio and they are not that anxious to bring in more risk specially with the talk in Washington to faze out the federal guarantee of these loans! So, if banks are nervous that they will not be able to sell these loans to Freddie Mac and Fannie Mae then they will have no choice but to raise credit requirements.
We wanted to document the Top 5 items that have the most impact on generating higher FICO scrore for a mortgage loan.
1) Length of Credit: For mortgage lenders a credit card that you have been using for 10 years is more valuable than the one you got 2 years ago with a higher limit. That’s why the allocate 15% of the FICO score calculation to this category.
2) Payment History: 35% of your overall FICO score is determined by your payment history. If you have missed payments on your previous mortgage or credit card this will seriously reduce your FICO score.
3) Amount Owed: If you have a credit card with a 1,000 limit and you owe more that 300 dollars or 30% on it, then your FICO score will be negatively impacted by this amount of debt which is considered high.
4) Types of Credit: Types of credit composes about 10% of your FICO score. If you have had mortgages that have been paid off or refinanced, it will improve your FICO score. But if there are Notice of Defaults or Bankruptcies in your history, your FICO will be severely impacted.
5) New Credit: Keep in mind that every new credit inquiry will lower your FICO score. New credit inquiries and starts are seen as risky and will impact your credit negatively. For instance, if you are shopping for a car and the dealers keep pulling your credit several times a month that is considered a risky profile. The impact of these inquires are minimized if they are done within a compressed window.
Bottom line is that you need to get pre-approved to have a shot of buying a home in this market. And it’s smart to understand what impact your credit and protect it dearly since it’s one of the only ways you are judged as a responsible borrower.
If you have any questions about your credit, contact us.